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Following a bumper FY23 in terms of APE growth and VNB margin on account of taxation changes, HDFCLIFE reported muted performance in FY24 with a largely flat APE at Rs 132.9bn and VNB declining 4.7% YoY to Rs35.0bn due to 130bps YoY VNB margin contraction to 26.3%. Beyond the sobering headline numbers, a few resets in FY24 that bode well for FY25 are: i) Adjusted for Rs10bn of the extra business in Mar-23, FY24 Retail APE grew 11% YoY. ii) Counter share in HDFC Bank improved to ~63% (+8-10ppts YoY). iii) Agency count grew by 80K in FY24 and number of Tier2/3 locations saw strong growth. Against this backdrop, Management is focused on and confident of delivering ~15% APE growth while keeping the margin stable. We adjust our FY25-26 estimates to reflect the Q4 developments and the new growth & margin realities; this leads to a ~4% cut in VNB. With most headwinds now behind and given better clarity of growth, we upgrade the stock to BUY from Add, with Mar25E revised TP of Rs725 (from Rs700 earlier), implying FY26E P/EV of 2.4x.

FY24, a year of reset after a bumper FY23

On reported basis, HDFCLIFE's FY24 performance was subdued, with APE staying flat and VNB declining 4.7% YoY owing to 130bps YoY contraction in VNB margin. However, an accurate assessment of the FY24 performance can be done only after peeling off the multiple layers of obscurity around these numbers. Adjusted for the Rs10bn excess business in Mar-23, HDFCLIFE logged a respectable 11% retail APE growth in FY24 on account of the taxation-changes impact. Additionally, the 130bps margin contraction appears benign, if seen in context of the slower reported APE growth and considering the sharp uptick in ULIP in the product mix. Overall, FY24 was the year of reset for the industry and HDFCLIFE, and when HDFCLIFE saw HDFC Bank becoming its promoter, life business seeing post-taxation change impact on high-ticket non-linked policies, and overhang of the impending surrender regulation changes being removed. On the operational front, persistency ratios stayed strong for the company, and the Opex ratio remained slightly elevated owing to various technology initiatives. The operating RoEV at 17.5% was good, especially when seen in light of the VNB decline.

Multiple levers to drive growth

Growth is likely to take centerstage in FY25, being driven by the omnichannel approach with margins staying broadly stable at current levels. Sustained momentum in the HDFC Bank channel after HDFC Bank turned into the company’s promoter would continue to help log some marginal gain in counter share at the HDFC Bank channel, and growth revival in the overall life insurance pie at the HDFC Bank channel will aid overall growth. Rapid augmentation of the agency channel in FY24, backed by 75 new branches, will drive the channel’s productivity & business volumes. Further, productivity improvement in newer banca partners will aid Company growth. Increased reach in Tier2/3 towns & beyond, via HDFC Bank and other national partners, should also back growth in FY25.

Worst now behind; upgrade to BUY

The worst, in terms of growth and margin, is now behind in our view. Increased synergy with HDFC Bank, Agency augmentation & branch expansion plans, and improving productivity at newer partnerships should drive growth in FY25. To account for the Q4 developments and the new growth & margin realties, we adjust our FY25-26 estimates which leads to a ~4% cut in our VNB estimates. HDFCLIFE shares currently trade on FY25E P/EV of 2.4x, at a material discount to its past average 1YF P/EV. Following the prolonged underperformance of HDFCLIFE shares, we see the past overhangs more than priced in now, and hence upgrade the stock to BUY, with revised Mar-25E TP of Rs725/share (vs Rs700 earlier), implying FY26E P/EV of 2.4x, on better growth visibility and attractive valuation.

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