Maintain ‘buy’ on HDFC Life with price target of Rs 800

We hosted Niraj Shah (CFO) for investor calls where he sounded optimistic about growth in premiums and sustaining margins near FY20-levels. FY22 can see margins expand with better scale and mix. A key negative is that mortality experience has been slightly worse than the past, but the company has reserves for that; guaranteed-return book is well hedged. Medium-term focus will be to scale up agency and maintain balanced mix of premiums and channel-contribution.

We maintain ‘buy’ on the stock with a price target of Rs 800 based on September ‘22 PEV of 5.0x. Optimism about growth stems from strong trends in recent months and stronger non-ULIP business. HDFC Life has been outperforming peers on growth (retail premiums APE) with 45% YoY rise in October and 8% YTD. Early entry in non-ULIP segments and ramp up of distribution platform have supported this growth; protection is also growing well. In terms of premium, for FY21, management expects high single-digit growth with mid-teens growth in FY22. In term of VNB margins, FY21 margin will likely be similar to FY20 while margin expansion in FY22 should drive ~20% VNB growth.

Mortality claims worsening; reserving in FY20 will cover for it. Management stated that claims on protection side had gone higher than expectations due to a combination of Covid-linked deaths and lagged filing of normal claims. Still, this should not have a material impact on margins as the company had made some buffer provision in FY20 itself.

Focus on non-bancassurance channels needs to backed by variablisation of costs. Over the medium-term, the company is looking to increase the contribution from its agency channel from 13-14% of premiums currently to 25%. While this will reduce dependence on bancassurance partnership, it will also need to variablise agency — costs, otherwise earnings could be more cyclical.

It has also forged distribution partnerships with Yes Bank and SBI Securities.

Indian insurers better placed to manage hedges on guarantee risks: Management reiterated that its guaranteed return book was hedged for interest rate and cashflow risks. Interestingly, management highlighted that three key reasons made Indian insurers better placed to hedge such exposures. India has a larger supply of long-term bonds from the government yield curve, is steeper than most countries and access to FRA-type of derivative contracts help to hedge better.

‘Buy’ stays. We see 18% CAGR in premiums over FY20-23 to drive 17% CAGR in VNB and ROEV of 18% in FY22.