We raise VNB estimates and see 17% CAGR in VNB over FY20-23 with 18% FY22 ROEV.
For Q2FY21, HDFC Life reported 21% y-o-y rise in VNB to Rs 5.5 bn, in line with estimates. Rebound in premiums to 21% y-o-y has been impressive and VNB growth has followed. This was led by uptick in sales through bancassurance channel (HDFCB) and sale of Par that compensated for weak Ulips/guaranteed return segment. Recovery in protection business was slower than expected. We raise VNB estimates and see 17% CAGR in VNB over FY20-23 with 18% FY22 ROEV. Buy stays.
Bounce-back in premiums led by par; protection upturn lagging: After a weak Q1 when premiums were down 30% y-o-y, HDFC Life reported a strong bounce back with 21% y-o-y growth in new premiums. The bancassurance channel (HDFCB being key) saw 38% y-o-y growth in individual new premiums. Among products, their Par version of Sanchay is doing well, leading to 253% y-o-y growth in Participating products and filling in the gap arising from weaker Ulips and part withdrawal from the guaranteed-return business (non-Par). We are a tad disappointed by the relatively slower uptick in the protection business (down 10% y-o-y & up 57% q-o-q), reflecting a slower rise in retail and credit-protect businesses.
VNB growth led by premiums; Par business more profitable than peers: VNB growth largely reflected the growth in premiums and some increase in share of Par business where margins are higher than peer-group. 13-m Persistency Ratio at 88% has improved a bit, largely reflecting improvement in the non-Ulip savings business. Still, we believe that persistency in non-Ulip segments is weaker and this leads to higher surrender incidence on clients & surrender charges for HDFC Life — an improvement here will allow the company to reduce surrender charges and not compromise on profitability. The guaranteed return business is 26% of premiums (vs 44% in Q2FY20) and hedging has kept the sensitivity of VNB manageable. Op. ROEV was at 17.6% for the quarter, driving a 16% y-o-y rise in EV; no dividend was paid for the period.
Maintain Buy: We raise our earnings estimates to factor in a better trajectory on premiums. We roll forward our target price of Rs 760 based on 4.8x Sep-22 Price/EV.
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