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Our view – Management flags irrational pricing in the system

Margin performance has been soft and guidance in this regard has been cautious: VNB margin for FY24 was 26.3% compared with 27.6% for FY23. Of the 130 bps decline in annual VNB margin, 70 bps is explained by lower operating leverage due to upfronting of Rs 10bn worth of APE in the last quarter of FY23. Another 40 bps decline is explained by higher share of unit-linked products. In terms of margin guidance, the company would like VNB to grow at broadly the same pace as APE but is willing to allow margin to fluctuate to some extent in order to deliver growth. Management stated that there is pressure on pricing due to irrationality, especially from aggregators for protection business but, at some point, rationality in pricing would return.

Management expects HDFL to at the upper end of industry growth expectation band or slightly better: On an un-adjusted basis, the individual APE growth in FY24 was 1% YoY. Growth of large-ticket products was impacted due to tax rule changes with share of policies above Rs 0.5mn ticket size declining from 12% earlier to about 6-7% of APE. Policies with ticket size less than Rs 0.5mn are growing in the high teens. In terms of growth guidance, the industry would grow at 12-15% and HDFC Life would at the upper end of this band or somewhat better. The counter share on HDFC Bank was 63% in FY24 compared with 56% in FY23. The counter share on HDFC Bank would continue to improve going forward and hence, HDFC Bank would grow faster than the company.

We maintain a less-than-bullish ‘ADD’ rating on HDFL with a revised price target of Rs 725: We value HDFL at 2.4x FY26 P/EV for an FY25E/26E RoEVprofile of 17.1%/17.2%.

Result Highlights (See “Our View” above for elaboration and insight)

* VNB margin: Calculated post-merger VNB margin de-grew by -72bps QoQ (comparable) and -317bps YoY (comparable) to 26.1%

* VNB: The post-merger VNB growth was 44.2% QoQ (comparable), aided by growth in APE

* APE: The post-merger APE was Rs 47,270 mn up by 48.1% QoQ (comparable) but down -8.4% YoY (comparable)

* Expense control: Post-merger Expense ratio decreased -68bps QoQ to 19.1% as opex ratio decreased -305bps QoQ but comm. ratio increased by 238bps QoQ

* Persistency: Post-merger, 37th month ratio rose 220bps QoQ to 73.4% and 61st month ratio rose 90ps QoQ to 52.0% (comparable)

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