Buy HDFC Life Insurance Ltd For Target Rs.880 - Emkay Global
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Robust performance
HDFC Life’s H1FY22 results were robust against the backdrop of excess mortality reserve (EMR), led by Rs6bn charge in H1 (Rs5.4bn in Q1FY22). Since HDFC Life’s monthly new business numbers were already known, the key monitorables in the results were VNB margin, EV growth, Covid-19 claims development and future guidance.
* Good result despite Covid-19 second wave:
HDFCLIFE reported 23% YoY growth in APE in H1FY22 to Rs41.1bn and 30% YoY growth in VNB to Rs10.9bn. VNB margin for H1 stood at 26.4% (1.3ppts YoY), almost in line with Q1FY22 margin of 26.3%. RWRP growth at 22% YoY was lower than the private sector average of 32%, but the 2-year CAGR of 12% for HDFCLIFE was higher than the 8% CAGR for the private sector. Embedded value grew to Rs287bn from Rs266bn. Operating RoEV (annualized) was good at ~16.1% and adjusted for EMR, it was at 18.4%. The company added Rs0.6bn to EMR in Q2FY22 and is carrying ~Rs2.0bn EMR at the end of H1FY22.
* Operating parameters broadly stable:
Operating parameters, including persistency, product mix, distribution mix and cost ratios, were broadly stable. On a YoY basis, the cost ratios grew slightly as H1FY21 saw some one-off cost savings owing to a salary freeze and a reduction in outdoor activities amid Covid-19 lockdowns. HDFCLIFE’s ULIP persistency numbers (excluding single premium and fully paid policies) were slightly poorer than IPRU’s, but at an overall portfolio level, persistency was similar. Additionally, the cost and persistency variances in H1FY22 EV move were positive at Rs1.4bn.
* Multiple levers for margin; management confident of sustaining margin expansion: Management reiterated guidance of sustained gradual margin expansion as they believe they have multiple levers to continue to improve margins. The shift in the product mix more toward annuity and protection products and operating leverage should support this consistent margin expansion in the coming years, in our view. With above industry growth in the medium term and gradually improving industry-leading margins, the company should be able to compound EV at ~20% in the medium term.
* No changes to our estimates; reiterate Buy:
As the result was broadly in line with our expectations and the management commentary was also consistent with past guidance, we keep our estimates unchanged. We reiterate our Buy rating as we believe that the consistent performance commands a valuation premium.
* TP of Rs880 based on appraisal value method, implies a FY23E P/EV of 4.9x:
We value HDFCLIFE based on the appraisal value method, using FY23E EV and then adding discounted VNB for future years. We assume: 1) 11.5% cost of equity; 2) 5% terminal growth rate of VNB in FY38; 3) APE CAGR of 12.7% over FY23e-38e, VNB CAGR of 13.1% over FY23e-38e; and 4) VNB margin (effective tax rate) of 30.4% flat from FY25. We have not built in the Exide Life merger scenario in our model yet.
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