Sharekhan Says ‘Buy’ HDFC Life Insurance with a Target Price of ₹870

Sharekhan is positive about HDFC Life Insurance Company, recommending a “Buy” rating and setting a target price of ₹870 in their report dated October 15, 2024.

Quarterly Performance Summary

HDFC Life had mixed results in Q2FY25. The company saw a healthy growth of about 27% year-on-year in Annual Premium Equivalent (APE), driven mainly by strong performance in the Unit Linked Insurance Plans (ULIP) and a solid rise in non-participating (non-par) savings. However, the Value of New Business (VNB) margins fell by around 200 basis points year-on-year to 24.3%, which was below the expected 25.4%. This decline was due to an unfavorable product mix and a temporary decrease in the Internal Rate of Return (IRR) for some non-par savings and annuity products, as the company needed to adjust its key products to comply with new surrender value regulations starting October 1. The VNB in absolute terms grew by 17% year-on-year.

Segment Performance

• The non-par segment saw impressive growth of 116% year-on-year.
• Retail protection growth remained strong, rising by 31% year-on-year.
• ULIPs reported a robust 50% growth year-on-year, although this was lower than last quarter.
• The Annuity and Group Protection segments faced declines of about 12% and 21%, respectively.

Distribution Channels

The bancassurance channel showed healthy APE growth of 25% year-on-year, helped by stable contributions from the parent bank (up 21% year-on-year) and strong ULIP sales. Meanwhile, APE growth from the agency channel improved significantly to 34% year-on-year, compared to just 11% in the previous quarter. Most persistency trends remained strong.

Financial Metrics

• The solvency ratio was slightly lower at 181%, but after a recent subordinate debt issuance, it improved to 192%.

Key Positives and Negatives

Positives:

• The non-par segment experienced impressive growth, driven by Click2Achieve.
• The agency channel’s APE growth improved, contributing to a broader distribution mix.
• Persistency trends remained strong.

Negatives:

• VNB margins were impacted by the product mix and temporary adjustments in IRR.
• The credit protection and annuity segments continued to face competitive pricing pressures.

Management Insights

• The company revised its APE growth guidance from approximately 15% to 18-20% for FY25.
• VNB is projected to grow by 15-17% year-on-year, with flexibility in trading off margins while focusing on growth.
• Due to the new surrender value regulations and a focus on ULIPs, VNB margins are expected to decline by 100-150 basis points in FY25 compared to FY24.
• The share of ULIPs in the overall new business premium is expected to stay around 30%.
• Ongoing adjustments to distributor pay-outs will be completed in Q3.

Investment Outlook

Sharekhan maintains a “Buy” rating on HDFC Life with an unchanged target price of ₹870. The stock is valued at 2.7x for FY2025E, 2.4x for FY2026E, and 2.1x for FY2027E. The company aims to maintain a balanced product mix and leads in new product launches. Growth is expected to be supported by strong performance in the non-par segment, focus on Tier II and III markets, increased market share at HDFC Bank, and partnerships with other bancassurance providers. While new regulations may impact VNB margins, the company could mitigate this through better pricing, changes in payout structures, and an improved product mix.

Key Risks

Potential risks include slower APE growth, lower VNB margins, and adverse regulatory changes that could impact profitability.