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PAT miss 6% YoY; VNB margin lower than estimates

Guides for steady VNB margins

* HDFC Life Insurance (HDFCLIFE) in 4QFY24 reported lower-than-expected margins at 26.1% with total APE at INR47.3b (broadly in line with estimates).

* Total APE declined 8% YoY to INR47.3b in 4QFY24 as Non-PAR declined 16% YoY; this was offset by a 25% surge in ULIP products.

* VNB margins at 26.1% was 60bp lower than expected with absolute VNB flat at INR 12.3b. EV grew 20% YoY to INR475b.

* 4QFY24 PAT at INR 4.1b was 6% lower than our estimates and saw a 15% YoY growth.

* For FY24, APE was flat YoY at INR 47.3b, whereas absolute VNB declined 5% YoY to INR 35b. For FY24, overall PAT grew 15% YoY to INR 15.7b.

* We have cut our APE growth and VNB margin assumptions based on 4QFY24 performance and the guidance. We now estimate HDFCLIFE to deliver ~16% VNB CAGR over FY24-26 and margin to be steady in the range of 26-27%. We reiterate our Neutral rating on the stock with a TP of INR670 (premised on 2.3x Mar’26E EV).

Strong growth of 25% YoY in ULIPs

* HDFCLIFE’s total premium rose 5.5% YoY to INR204.9b (9% miss) within which new business premium declined 8.1% YoY, while renewal premium grew 23.3% YoY.

* Total APE declined 8% YoY to INR47.3b in 4QFY24 with individual APE at INR 42.4b, a decline of 6% YoY. In 4QFY24, Non-PAR declined 16% YoY, while ULIP products surged 25% YoY.

* VNB declined 18% YoY (in line) with margins missing our estimates by 60bp at 26.1% (320bp decline YoY) in 4QFY24.

* On the distribution front, based on individual APE, the share of banca improved to 65%, while the agency channel constituted 18% share for FY24. This increase was at the cost of direct and broker channel as it continues to face headwinds in the form of heightened competition and its share moderated to 11% and 6%, respectively, for FY24.

* EV grew 20% YoY to INR475b. Total AUM increased 22% YoY to INR2.9t, while solvency ratio stood at 187% (300bp QoQ decline)

Highlights from the management commentary

* APE growth in tier 2/3 markets has outpaced company-level growth. HDFCLIFE expects the private life insurance industry to grow at 12-15% in FY25, with the company aiming to achieve growth at the higher end of the range.

* In FY24, the new business margins stood at 26.3% vs. 27.6% in FY23. The decline in margin was on account of higher ULIP share and operating deleverage. While the ULIP share remained largely stable at 20-25% over FY21-23, it rose to 35% in FY24, thereby impacting the margins. Additionally, significant up-front investments were made in the proprietary channel, with benefits expected to be realized later or with a lag, further impacting margins.

Valuation and view

HDFCLIFE remains focused on maintaining a balanced product mix, with an emphasis on product innovation and superior customer service. Growth in lower tier cities will be the key focus areas with expansion of HDFC Bank’s branch network and deepening of HDFCLIFE’s branch network. Persistency trend improved across cohorts and this is expected to sustain healthy growth in renewal premiums. The company’s guidance for premium growth in the private life insurance industry stands at 12-15%. It aims to grow at the higher end of this range while maintaining VNB margins. We have cut our APE growth and VNB margins assumptions based on 4QFY24 performance and the guidance. We now estimate HDFCLIFE to deliver ~16% VNB CAGR over FY24-26 and margin to be steady in the range of 26-27%. We reiterate our Neutral rating on the stock with a TP of INR670 (premised on 2.3x Mar’26E EV).

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