Buy HDFC Life Insurance for Target Rs.720 - Yes Securities Ltd
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HDFC Life Insurance
Higher market share on HDFC Bank sustains but still does not move the growth needle
Result Highlights (See “Our View” below for elaboration and insight)
* VNB margin: Calculated post-merger VNB margin grew by 52bps QoQ (comparable) but de-grew -2bps YoY (comparable) to 26.8%
* VNB: The post-merger VNB growth was 6.9% QoQ (comparable), aided by both growth in APE and margin expansion
* APE: The post-merger APE was Rs 31,910 mn up by 4.8% QoQ (comparable) but down -2.1% YoY (comparable)
* Expense control: Post-merger Expense ratio decreased -2bps QoQ to 19.8% as opex ratio decreased -15bps QoQ but comm. ratio increased by 13bps QoQ
* Persistency: Post-merger, 37th month ratio fell -30bps QoQ to 71.2% and 61st month ratio fell -30bps QoQ to 51.1% (comparable)
Our view – Slow growth with marginal neutrality does not make for significant upside
HDFL seems to be hit fairly hard by the taking away of tax advantages for large-ticket policies: Business below Rs 0.5mn ticket size has grown at about 3x the company growth on YoY basis, implying large-ticket policies have de-grown materially. The share of policies above Rs 0.5mn has declined from 12% last year to 6% currently. Management stated that peers have grown faster since they have dropped VNB margin whereas the company has maintained margin. The company is aiming for 10% YoY growth in 4Q, excluding the Rs 10bn upfronted business done in March last year.
HDFL has benefited from HDFC Bank becoming its parent but that does not seem to be enough to shore up overall growth: The bancassurance channel individual APE has grown 17% YoY in 9M. The counter share on HDFC Bank channel has been maintained at mid 60s compared with pre-merger levels of mid 50s. The company has expanded personnel count in the branches of the bank. The agency channel has been relatively sluggish, growing 7.9% YoY. Direct channel has de-grown -20.9% YoY whereas Brokers and Others have de-grown -28.1% YoY.
We maintain a less-than-bullish ‘ADD’ rating on HDFL with a revised price target of Rs 720: We value HDFL at 3.1x FY25 P/EV for an FY24E/25E/26E RoEV profile of 18.4%/18.9%/19.3%
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