HDFC Life Insurance Q1 Review: Analysts Bet On Premium Growth, Balanced Product Mix
Here’s what brokerages have to say about HDFC Life’s Q1 FY23 performance.
Analysts expect HDFC Life Insurance Co. Ltd. to benefit from a steady growth in premiums, backed by a balanced product mix and distribution channel even as cost ratios were elevated and retail protection sales were weaker than expected in the first quarter.
The private life insurer’s net profit rose 22% year-on-year but declined 35% sequentially in the quarter ended June. Its revenue, too, fell by more than half over the year ago.
Value of new business—present value of the future profits associated with new business written during the period—grew 25% to Rs 510 crore. VNB margin was at 26.8% against 26.2% a year ago.
Shares of HDFC Life gained as much as 0.97% at open on Wednesday and are trading 0.8% higher as of 9:40 a.m. Of the 36 analysts tracking the company, 32 maintain a ‘buy’ and four suggest a ‘hold’, according to Bloomberg data. The 12-month consensus price target implies an upside of 32%.
Here’s what brokerages have to say about HDFC Life’s Q1 FY23 performance:
Motilal Oswal
Maintains ‘neutral’ with a target price of Rs 600 apiece, implying an upside of 12%.
The company reported growth in new business and renewal premium aided by an improving persistency ratio across key cohorts.
Annualised premium equivalent grew 22% but missed estimates by 9% in Q1 FY23.
Growth was broad-based across all products. However, demand for unit-linked insurance plans and retail term insurance was soft due to a volatile capital market and declining fear of the Covid-19 pandemic.
Protection growth of 30% year-on-year was led by credit life as retail term insurance remained under pressure.
Embedded value declined 1% quarter-on-quarter to Rs 2.97 lakh crore due to negative economic variance and payment of dividend.
The management remains focused on maintaining a balanced product mix across businesses.
In the near term, non-participating and annuity is likely to clock healthy growth, while protection will witness a gradual recovery over FY23.
Credit life will lead growth in protection as momentum in retail term insurance remains soft.
Demand for retail term insurance is expected to return, as inflation moderates in H2FY23.
Demand for ULIP remains muted due to a volatile capital market.
Persistency trends remain steady and continue to aid robust renewal trends.
Nomura
Maintains ‘buy’ with a target price of Rs 660 apiece, implying an upside of 23%.
Results were largely steady, with continued traction in non-par and recovery of credit life supporting margins.
Well-balanced product mix and channel/distribution strengths allow it to maintain a steady growth profile.
Over the past two to three years, operating parameters for peers have converged with HDFC Life, leading to valuation premiums compressing.
Headwinds are emerging, with growth moderating and value of new business margins peaking.
In that context, HDFC Life’s distribution strength and well-balanced product suite will support consistent delivery both in market share and margin profile.
VNB margin expanded aiding VNB growth of 25%, while an increasing cost ratio capped margin expansion.
Return on embedded value came in flat year-on-year adjusted for Covid-related mortality impact in the base.
The company’s solvency ration stood at 178%. It targets to
maintain solvency in the 180-200% range. However, management highlighted that it will evaluate the need for capital depending on macroeconomic conditions.
Nirmal Bang
Maintains ‘buy’ with a target price of Rs 737 apiece, implying an upside of 38%.
HDFC Life’s growth in total APE was driven by strong growth in non-par savings, while par savings also contributed positively.
Overall protection segment growth was also strong, but it was mostly led by credit life as retail term protection growth is estimated to have
declined sharply.
The management cited inflation-led consumer sentiment impact and tighter underwriting criteria as the key headwinds affecting retail protection sales.
However, the same is expected to pick up in H2FY23 as macro risks abate.
The management remains focused on maintaining a balanced product mix.
Exide Life’s integration in on track and the merger is expected to be completed by H2FY23.
Product mix was largely stable. The share of protection declined from 8% to 5%, likely constrained by supply-side challenges.
Return of premium products have become more meaningful, with its contribution increasing from 25% to around 33%.
Within the banca channel, HDFC Bank’s growth continued to be steady, while other banca partnerships also saw an improved performance.
The company has also been working on augmenting its direct channel.
Overall top line performance was decent, but headwinds on retail
protection growth are a cause for concern.
Emkay Global
Reiterates ‘buy’ with a target price of Rs 680 apiece, implying an upside of 25%.
HDFC Life reported a relatively modest set of numbers for Q1FY23 vs the brokerage’s expectations.
VNB margin for the quarter was supported by better product mix, but was affected by changes in mortality assumptions and increased fixed costs.
Overall, FY23 has started on a mixed note amid the challenging macro-economic scenario.
Fundamentally, HDFC Life business continues to be on the right track, but uncertainties relating to the HDFC Bank-HDFC merger continue to weigh on its shares.
Management sounded confident about achieving its typical APE growth (2x real GDP growth), while gradually expanding standalone margins.
The margin expansion will be supported by the return of growth in retail protection, operating leverage and some shift in savings products to better margin-yielding products.
Regarding the impact of the HDFC Bank-HDFC Ltd. merger, management remains confident about the continuity of ownership and its close relationship with HDFC Bank.
It sees a significant business opportunity and complementarity in health product offerings if the regulator allows life insurers to design and distribute health indemnity products.
Management is comfortable with the solvency ratio staying around its targeted 180% range and sees no hurdle to growth from the solvency side.
However, to capture any meaningful growth opportunity, management is open to the idea of raising equity capital.
Notwithstanding the near-term turbulence, HDFC Life deserves a premium valuation for its consistent and robust performance.
Morgan Stanley
Maintains ‘overweight’ with a revised target price of Rs 705 apiece from Rs 720, implying an upside of 32% from the closing price on July 19.
APE growth, VNB growth, and margin expansion were healthy,
but below the brokerage’s estimates and consensus.
Retail protection was weaker than expected and negative economic variance was much higher.
However, the continued VNB delivery amid tough conditions is underappreciated.
VNB margin missed estimates due to decline in the high-margin retail protection APE, higher expenses: business travel and other
spending resumed with the pandemic receding and the company accounting for costs on actual basis.
Cost ratios appear elevated in Q1 and progressively decline through the year along with improving revenues and thus margins.
Of the negative economic variance, Rs 400 crore was contributed by a mark-to-market decline in equities, while the balance came from
bonds.
Per management, there is a slowdown in demand for retail protection, likely owing to a change in underwriting norms, like requirement for medical tests, etc.
It expects the business to pick up in H2 as customers adapt to new requirements.
Management reiterated that guaranteed return products in India are a new investment category that is here to stay, given meaningfully
higher post-tax returns than fixed deposits in addition to taking care of the reinvestment risk. It sees continued strong growth in these products.
