Buy HDFC Life Insurance Ltd For Target Rs. 800 By Motilal Oswal Financial Services Ltd
VNB margin beats estimate; APE growth weak
* HDFC Life Insurance (HDFCLIFE) reported APE of INR35.7b (8% miss) in 3QFY25, up 12% YoY, driven by a 15% increase in sales of policies and a balanced product mix. For 9MFY25, APE grew 20% YoY to INR102.9b.
* VNB rose 9% YoY to INR9.3b (in line) in 3QFY25 and grew 14% YoY to INR25.9b in 9MFY25. VNB margins for 3QFY25 came in 110bp above our estimate at 26.1% vs. 24.3% in 2QFY25 and 26.8% in 3QFY24.
* 3Q PAT grew 14% YoY to INR4.1b, in line with our estimate. For 9MFY25, PAT grew 15% YoY to INR13.3b, aided by 18% YoY growth in the back-book surplus.
* The impact of surrender charges on VNB margins was 30bp in 3QFY25. The company implemented changes in commission constructs, leading to an equal distribution of the impact from surrender charges.
* We have increased our VNB margin assumptions on account of a betterthan-expected performance in 3QFY25. We now estimate HDFCLIFE to deliver a 19% VNB CAGR over FY24-FY27E and margin to trend higher going ahead. Reiterate BUY with a TP of INR800 (based on 2.5x Sep’26E EV).
APE growth of 12% led by 27% growth in non-par segment
* For 3QFY25, gross premium income grew 11% YoY to INR172.8b (5% miss), driven by 11%/12% YoY growth in new business/renewal premiums.
* Overall APE growth was 12% YoY, led by 27% growth in the non-par segment and 25% growth in the term business. Individual APE growth was 9%, led by 17% growth in non-par and 12% growth in protection. Share of ULIPs was at 31% on overall APE vs. 20% in 2QFY25 and 32% in 3QFY24.
* The overall channel mix between banca/agents/direct/broker has remained steady at 65%/17%/11%/7% for the past three quarters. On a YoY basis, the share of banca has increased at the cost of agency channel. Counter share at HDFC Bank was steady at 65%.
* The number of policies grew by 15% to 0.88m, outperforming the private sector’s growth at 9%.
* For 9MFY25, the persistency ratios for 13th and 61st month improved 110bp and 780bp to 87% and 61%, respectively, reflecting strong customer retention. ? Total AUM as of Dec’24 increased by 18% YoY to INR3.3t, with AUM mix for Debt: Equity at 67:33 as of 9MFY25.
* Embedded value (EV) grew 18% YoY to INR532.5b, with operating return on EV at 16%. The solvency ratio stood at 188% vs. 190% in 3QFY24, well above the regulatory threshold of 150%.
* During 9MFY25, HDFCLIFE reported 20% YoY growth in total APE, driven by 24% YoY growth in individual APE. VNB grew 14% YoY to INR25.9b. VNB margins contracted 140bp YoY to 25.1%, mainly due to a shift toward ULIP share in the product mix. The implementation of surrender value regulations led to a 10bp impact on margins. PAT grew 15% YoY to INR13.3b.
* The management expects margins to remain stable or slightly higher due to better growth in business in 4Q (seasonality impact) and no significant deterioration in the product mix.
Highlights from the management commentary
* The growth guidance (18% APE growth) has been retained, with 4QFY25 likely to see the benefits of seasonality.
* The company did not revise prices in 3Q, but it expects peers to cut prices due to the impact of the interest rate environment.
* Margins are expected to be in the similar zone or slightly better due to higher business in 4Q and no significant deterioration in the product mix.
Valuation and view
* HDFCLIFE aims to maintain a balanced product mix and gain a higher market share, focusing on geographical expansions and customer acquisition. Persistency trends have been improving across cohorts, which will keep the renewal premium growth steady. Changes in the commission structure after the discussion will lead to only 20-30bp impact on VNB margins due to the surrender charge regulation. Management has guided for steady or slightly better margins on account of better growth in 4Q and no deterioration in the product mix.
* We have increased our VNB margin assumptions on the back of a better-thanexpected performance in 3QFY25. We now estimate HDFCLIFE to deliver a ~19% VNB CAGR over FY24-FY27E and margin to expand from 25.4% in FY25E to 26.8% in FY27E. Reiterate BUY with a TP of INR800 (premised on 2.5x Sep’26E EV).
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