HDFC Life Insurance Q2 Review: Analysts See Steady Margins After Merger With Exide Life

Most analysts retained their 'buy' ratings on HDFC Life Insurance Co. after the second-quarter earnings as strong growth in group protection more than offset the continued decline in retail protection.

With the insurer completing the merger with Exide Life Insurance Co. during the quarter, analysts expect new business margins to remain unchanged in FY23 as guided by the management earlier.

They also expect improvement in the company's reach, especially in the rural region, with its latest tie-up with India Post Payment Bank.

According to Emkay Global, the merger between Housing Development Finance Corp. and HDFC Bank Ltd. is expected to be the key driver for the insurer's shares in the near term.

The private life insurer's net profit rose 19% year-on-year but declined 9% sequentially in the quarter ended September. Its revenue rose 12% in the quarter.

Value of new business—present value of the future profits associated with new business written during the period—grew 19% to Rs 1,288 crore post merger for the half year ended September 2022. VNB margin for H1FY23 was at 26.2% against 26.4% a year ago. Pre-merger margins for six months ended September 2022 were higher at 27.6%.

Shares of the company eased 0.55% to Rs 538.6 apiece as of 11:25 a.m., while the Nifty 50 was 0.53% down on the NSE.

Of the 34 analysts tracking the company, 32 maintain a ‘buy' while two suggest a ‘hold', according to Bloomberg data. The 12-month consensus price target implies an upside of 26.6%.

Here's what brokerages have to say about HDFC Life's Q2 FY23/H1FY23 performance:

Motilal Oswal

• Maintains ‘neutral' with a target price of Rs 600 apiece, implying an upside of 11%.

• 6% year-on-year growth in total premium in Q2FY23 was led by 23% year-on-year growth in renewal premium while new business premium saw a contraction of 7% year-on-year.

• APE grew 4% year-on-year (5% miss) in Q2 on a pre-merger basis driven by annuity, non-linked savings and credit life.

• Protection grew 37% year-on-year led by credit life with 66% year-on-year growth in new business premium.

• Demand for ULIP was soft due to volatile capital markets

• Retail protection trend has improved sequentially with a growth of 26%.

• HDFC Life is optimistic of improving this momentum as it looks to grow consolidated VNB at 15%+ in FY23E.

• VNB margin improved on pre-merger basis, primarily driven by a more optimal business mix.

• Including Exide Life, VNB margin stood at 26.2% in H1FY23.

• The management aims to maintain FY22 margin (27.4%) in FY23 as well, as the drag from consolidation reduces.

• In the near term, non-par/annuity is likely to witness healthy growth while retail protection should see a gradual recovery over H2FY23.

• Credit life will lead growth in protection as momentum in disbursements across lending institutions is strong.

• On the distribution front, the share of banca and agency increased to 58% and 19%, respectively.

• This increase was at the cost of direct channel as it continues to face headwind in the form of heightened competition.

• Persistency trend improved across all cohorts for pre-merged entity.

• HDFC Life has the scope to improve post-merger margins by bringing in efficiencies in the operations of Exide Life.

Emkay Global

• Maintains ‘buy' with a target price of Rs 670 apiece, implying an upside of 24%.

• Pre-merger APE, VNB margin and embedded value broadly in line with estimates, and showing growth and improvement over the previous-year and prior-quarter.

• In product terms, strong growth in group protection, especially credit life, more than offset the continued decline in retail protection, thus driving the overall protection APE growth to 24% year-on-year.

• The merged-entity VNB margin at 26.2% was almost on par with HDFC Life's 26.4% in H1FY22.

• This granted added confidence on the merged-entity's FY23 margin being at parity with HDFC Life's FY22 margin.

• On pre-merger basis, persistency across most cohorts improved.

• With Exide Life persistency showing gradual improvement, post the merger, the merged-entity's persistency in FY23 should be broadly in line with that of pre-merger HDFC Life's in FY22.

• On the cost front, with productivity of the Exide Life agent and employee improving, cost ratios are likely to improve hereon.

• The solvency ratio for H1 at 210% was better than that in Q1FY23 and FY22, largely led by the Rs 2,000 crore preferential capital-raise in Q2.

• The company expects improving its reach among masses, with its latest tie-up with India Post Payment Bank.

• Changed estimates to factor in: i) the slower growth in H1 vs FY23E; ii) Exide Life merger lifting topline numbers by ~8% and entailing a slightly negative impact of ~40-80 basis points on the VNB margin.

• Company's dependence on forward rate agreements is lower than other players'; it has 10-11 counter parties.

• Given that the merger process is now behind, synergy and integration will play out over the next 12-24 months.

• However, besides operating performance, the merger process and modalities of the HDFC-HDFC Bank merger are likely to be the key drivers for the insurer's shares in the near term.

• Management said that APE growth for FY23 is likely to range at 15-17% and the parent company merger would further accelerate this growth.

Axis Capital

• Maintains ‘buy' with a target price of Rs 670 apiece, implying an upside of 24%.

• APE growth was soft at 3.8% year-on-year.

• Calculated VNB margin at 28.6% was driven by VNB of Rs 750 (11% YoY). Merged VNB margin was at 26.2%.

• Capital infusion of Rs 2,000 crore improved solvency and EV.

• While non-par savings and protection grew well, ULIPs and group savings remained muted.

• Within non-par, Sanchay FMP has been doing well and now contributes 20% to the premium.

• Management targets 15-17% APE growth on a merged basis driven by increased product suite and geographical expansion in tier II/ III cities.

• The company expects to maintain FY22-margin neutrality for the combined entity over the next 3-4 quarters with a positive bias.

• Its banca partnerships are witnessing significant traction.

• Partnership with Yes Bank / Bandhan Bank and IDFC First Bank is yielding results. Recent mandate to tie up with India Post Payments Bank will give it access to rural India and increase touch points.

• It added 24,000 agents in H1FY23.

• It expects merger with HDFC Bank at somewhere along the line as the promoter is its largest distributor.

• With solvency ratio now well above regulatory requirement and merger process complete, HDFC Life is on track to increase its penetration and offer complete bouquet of products to Exide Life customers and vice versa.