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NRI
HDFC Life Insurance Company Ltd>
  • CMP : 698.2 Chg : -0.65 (-0.09%)
  • Target : 670.0 (21.82%)
  • Target Period : 12-18 Month

27 Apr 2022

Structural growth story intact; awaits synergy benefit

About The Stock

HDFC Life is among the most dominant players in the Indian life insurance industry with a strong distribution network, parentage, operating metrics.

  • Balanced product mix with focus on non-par, protection & annuity business
  • Industry leading VNB margins of over 26%
Q4FY22 Results

HDFC Life reported a decent overall performance.

  • Gross premium grew at a healthy pace of 11% YoY to ₹ 14290 crore
  • VNB margins were healthy at 27.4% for FY22, due to balanced product mix
  • Persistency improved for 13th, 61st month to 86.8%, 54.4%, respectively
  • PAT at ₹ 357.5 crore was up 12.4% YoY, aided by decline in actuarial liability
What should Investors do?

HDFC Life’s share price has given modest return of just over 10% past two years post recent correction & provides entry opportunity. 

  • We retain our BUY rating on the stock
Target Price Valuation

Insurance under penetration coupled with focus on product mix to aid healthy business growth and VNB margin. Market share trend and synergy benefit from Exide merger to be watched. We value HDFC Life at 2.8x FY24E EV with TP of ₹ 670.

Key Triggers for future price performance
  • Healthy guidance on VNB margins (standalone) to aid profitability
  • Focus on product mix & new launches to aid business growth
  • Strong distribution network remains core to maintain business momentum
  • Merger process to be completed by H1FY23, synergies to play out
New Stock Ideas

Apart from HDFC Life, in our coverage we also like SBI Life.

  • SBI Life also comes with a strong parentage with strong distribution network and superior cost efficiencies

 

  • BUY with a target price of ₹ 1,400

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 3 year CAGR _(FY19- FY22) FY23E FY24E 2 year CAGR _(FY22-24E)
New business premium 14,971.5 17,238.5 20,106.6 24,155.0 17.3 34,276.6 41,210.1 30.6
APE 6,049.4 7,163.7 8,183.2 9,758.0 17.3 13,762.6 17,278.8 33.1
Total premium 29,186.0 32,706.9 38,583.5 45,963.0 16.3 58,467.3 71,532.9 24.8
PAT 1,176.8 1,370.9 1,360.1 1,208.0 0.9 1,873.4 2,002.4 28.7
EV 18,296.0 20,655.0 26,625.0 30,048.0 18.0 39,115.3 48,185.8 26.6
P/E (x) 94.2 80.9 81.6 61.4 - 61.8 57.8 -
P/BV (x) 20.0 16.3 12.9 11.4 - 6.8 4.8 -
P/IEV (x) 6.1 5.4 4.2 3.5 - 3.0 2.4 -
RoEV (%) 20.1 18.1 18.5 19.3 - 17.9 17.9 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q4FY22 Results: Healthy business growth; controlled opex aid earnings

  •                 HDFC Life posted a good set of numbers on an overall basis as GWP was up 17.7% QoQ and 11.7% YoY to |14422 crore, was mainly driven by strong 21.7% QoQ growth in first year premium and 32.4% sequential uptick in renewal premium. On APE basis, the growth came in at 16.5% on full year basis.
  •                 Based on total APE, non-par savings now form 28% of total mix while protection +annuity business contributes 19% vs. 26% and 18%, respectively, a year ago
  •                 Commission ratio declined ~ 30 bps YoY to 4.3% but was up 10 bps QoQ. Opex ratio (management expense) ratio increased ~20 bps QoQ to 12.5%
  • HDFC Life settled around 3.9 lakh claims. Gross and net claims amounted to | 5804 crore and | 4328 crore, respectively. PAT for the quarter was at
    | 357.5 crore, up 12.4% YoY, higher than our estimate, helped by change in actuarial liabilities
  •                 New business margin for FY22 came in at 27.4% as against 26.1% YoY
  • AUM was at | 204170 crore, up 17% YoY. Debt to equity mix in AUM was at 63:37 with ~98% of debt investments in G-secs and AAA bonds
  •                 Persistency ratio largely remained buoyant with 13th month persistency at 86.8% and 61st month persistency at 54.4% versus 84.5% and 51.1% in the last quarter respectively
  •                 Individual WRP growth of 16% resulting in industry market share expansion by 10 bps to 9.3%
  •                 Indian embedded value was at | 30048 crore as of March 2022, up 13% YoY. Solvency ratio was at 1.76x

 

Q4FY22 earnings conference call highlights

  • Annual profit reduced YoY for FY22 due to higher mortality reserves creation. Continue to hold | 55 crore additional reserves
  • Cash payout of ~| 730 crore, impacted solvency by ~13 bps to 176%
  • Merger approval expected by H2FY23E
  • Expect VNB margins to trend upwards on standalone basis
  • On a merged basis with Exide Life, margins to be similar to FY22
  • May raise capital (equity + debt) as and when needed. Will maintain solvency around 180%
  • Higher mortality assumption led to negative operating variance
  • HDFC Ltd engaged primarily in credit protect business. Focus on cross selling to home loan customers post-merger
  Q4FY22 Q4FY22E Q4FY21 YoY (%) Q3FY22 QoQ (%) Comments
First Year Premium 2,574.9 2,568.0 2,389.2 7.8 2,116.0 21.7 Higher business activity aids FYP
Renewal Premium 7,341.2 7,690.9 6,350.4 15.6 5,543.0 32.4  
Single Premium 4,505.2 4,687.0 4,170.6 8.0 4,595.8 -2.0  
Net Premium income 14,290 14,797 12,868 11.0 12,124 17.9 Healthy renewals push growth
Income from Investments 1,765.3 5,663.9 6,323.3 -72.1 2,097.9 -15.9 Lower inome due to hardening of yields
Total revenue 16,054.9 20,461.2 19,191.3 -16.3 14,222.2 12.9  
               
Commission 620.7 665.9 597.5 3.9 507.4 22.3 Sequentially higher commissions due to higher business
Operating expenses 1,809.0 1,775.7 1,510.1 19.8 1,502.4 20.4  
Management Expenses 2,429.7 2,441.5 2,107.6 15.3 2,009.8 20.9  
Benefits paid 9,643.5 9,618.2 8,837.6 9.1 8,081.3 19.3  
Change in Actuarial Liability 3,173.4 8,005.0 7,622.7 -58.4 3,850.0 -17.6 Reduced liability due to better interest rates
Total Expenses 12,816.9 17,623.2 16,460.3 -22.1 11,931.3 7.4  
               
Surplus/ (deficit) 707.2 354.4 617.8 14.5 201.7 250.6  
               
Transfer to SH's A/c 500.0 200.0 286.6 74.5 182.5 174.0  
Investment income 147.5 202.9 271.3 -45.6 179.1 -17.6  
Profit/ (loss) before tax 321.6 342.9 309.1 4.0 275.9 16.5  
PAT 357.5 338.9 317.9 12.4 273.7 30.6 Driven by change in acturial liability
               
Key Metrics              
NBP 7,080.1 7,255.0 6,559.8 7.9 6,711.7 29.9 Higher mix in protection and non-par business ahelps
AUM 2,04,170 1,79,503 1,73,839 17.4 1,94,776 5.0  
IEV 30,048 31,345 26,620 12.9 29,543 6.3  

Terms & conditions and other disclosures

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I/We, Kajal Gandhi, CA, Vishal Narnolia, MBA, Sameer Sawant, MBA Research Analysts Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.          

 

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