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Focus shifts to FY25 post a muted FY24

Lackluster APE growth in Q3FY24 (-2% YoY; -8% vs. our est.; but known after industry’s monthly update) and our muted expectations for Q4FY24 (- 6%YoY)—due to an abnormally high base of Q4FY23 on account of high-ticket bumper sales—are impelling a flat APE performance in FY24. Against this backdrop, the focus shifts to FY25 growth and margin profile, for which we remain optimistic as the sustained improvement in HDFC Bank channel productivity, deepening of geographic presence, and product innovation are likely to aid growth. To account for the 9MFY24 performance, we reduce FY24- 26E APE and VNB by 4-6%, while cutting FY26E VNB margin by ~60bps. We maintain ADD on the stock, revising down Dec-24E TP to Rs725/share (implying FY25E P/EV of 2.8x) from Rs750 earlier, as we believe the amalgam of brand, distribution and innovation positions the company well to deliver better-thanindustry performance amid a constantly evolving regulatory landscape.

APE declines during Q3FY24; VNB margin remains stable

HDFC Life reported a miss on APE at Rs31.9bn for Q3FY24 (-2.1% YoY) vs. our expectation of Rs34.7bn. The decline in APE during Q3 resulted in a muted 4.8% YoY growth during 9MFY24 at Rs85.6bn. The slowdown in APE during Q3 was owing to tepid growth in higher-ticket size policies (above Rs0.5mn). VNB margin at 26.5% for 9MFY24 remained stable YoY, largely in line with our expectation, and implying a 26.8% VNB margin for Q3FY24. On account of slower APE growth and stable VNB margin, the VNB grew at a slow pace of 4.8% for 9MFY24, while declining 2.2% YoY for Q3FY24 to Rs8.6bn. For 9MFY24, PAT at Rs11.6bn grew 15.5% YoY – a slight miss on our estimates. HDFC Life reported EV of Rs451.7bn for 9MFY24 (Emkay: Rs453bn), growing 14% over FY23. Persistency across cohorts remained broadly stable on a sequential basis, while Commission Ratio saw some elevation.

Host of factors responsible for the muted FY24 growth; all eyes on FY25

The muted growth performance in 9MFY24 and FY24E is owing to a host of underlying factors, including: 1) the impact of taxation changes on high-ticket non-linked policies affecting Wealth channels; and 2) price correction impact on GTI and moderation in credit life in Q3. However, on the positive side: i) share in the HDFC Bank channel continued to improve; ii) number of retail policies saw growth of 9% in Q3FY24 and 9MFY24; iii) Company saw a few blockbuster product launches including Click 2 Achieve and some new banca partnerships including KVB and Karnataka Bank; iv) the deepening reach in Tier2/3 markets continues to drive stronger growth in the related geographies. Company remains focused on balancing the product mix, despite the higher share of ULIPs in the quarter. VNB margin stayed flat due to improved margins across products and a relatively higher share of Non-Par products driven by new product launches. The management remains confident about the FY25 growth story on the back of the protection gap opportunity, expansion in tier 2/3 markets, and growth revival in high-ticket size policies.

Downward revision in APE estimates; retain ADD, with TP cut to Rs725/share

To factor-in the 9MFY24 performance, we have cut FY24-26E APE and VNB by ~4.5% and snipped the FY26E VNB margin, leading to a 5-6% trim to our VNB estimates. We maintain our ADD rating on the stock, with Dec-24E TP revised down to Rs725/share (implying FY25E P/EV of 2.8x) from Rs750 earlier, as we believe the combination of brand, distribution and innovation positions the company well to deliver better-thanindustry performance amid a constantly evolving regulatory landscape.

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