Confident of maintaining 15- 20% growth in VNB – HDFC LifeTanmay Gadre
Update on the Indian Equity Market:
On Tuesday, NIFTY ended higher at 18,268 (+0.8%) as it closed near the intraday high level of 18,310. Among the sectoral indices, REALTY (+3.6%), METAL (+2.7%), and MEDIA (+2.6%) ended higher, whereas PRIVATE BANK (-0.2%) was the only sector that ended lower. Among the stocks, TATAMOTORS (+6.0%), TATASTEEL (+4.2%), and SBILIFE (+3.8%) led the gainers while INDUSINDBK (-1.9%), ICICIBANK (-1.2%), and POWERGRID (-0.8%) led the losers.
Excerpts of an interview with Ms. Vibha Padalkar, MD and CEO, of HDFC Life Insurance (HDFCLIFE) with CNBC TV18 on 25th October 2021:
- The company is bullish on prospects of the life insurance industry, assuming no covid 3rd wave takes place. As people get comfortable with the status quo, the company expects the demand for life insurance to come back.
- The company has grown at a rate of 20%, which is faster than the industry growth rate and it is confident that it will continue to grow at this rate. VNB (Value of New Business) growth between 15-20% is possible.
- From the product mix, Unit linked, participating, non-participating, annuity, and protection contribute around 26%, 30%, 32%,5%, and 7% of the APE (Annualised Premium Equivalent) respectively.
- The company has paid out 2,456 claims worth Rs 5,560mn in 1HFY22, and it maintains an additional Rs 2,000+ mn of provisions in case it needs to pay out any additional claims.
- The company expects a 10-15% price hike in reinsurance products and it is in negotiation with its reinsurance providing partner over the price hikes. This will be done by the end of 3QFY22.
- Individual term insurance doesn’t disproportionately contribute to the VNB of the company. The reinsurers charge HDFC life for the product over the lifetime of the policy, whereas the customers pay premium under the limited pay for 5-6 years altogether. As the period between these 2 differs, the company hasn’t yet figured out the cost it will pass on to its customers.
- The company’s cash will go down by 12 to 14% after the acquisition and merger of Exide Life. HDFC life’s solvency may go down to 175-180% from the current 190-195%, but the profits from the next two quarters may get added on to the solvency and help bridge the gap.
Asset Multiplier Comments
- As Exide Life’s agency channel will add 40% to the company’s current agency channel, the company will benefit from the effect of operating leverage. This will help improve the company’s margins.
- The company has posted 20.8% YoY growth in APE and 23.6% YoY growth in VNB (Value of new business) numbers in 2QFY22. Given its better than industry growth rate, and the management’s confidence in maintaining it in the future, this might have a positive impact on the company’s fundamentals.
- Increase in reinsurance costs will likely drive term insurance rates higher in the next few quarters. This may have impact on its future profitability.
Consensus Estimate: (Source: market screener website)
- The closing price of HDFCLIFE was ₹ 690/- as of 26-Oct-2021. It traded at 100x/ 76x/ 64x the consensus earnings estimate of ₹ 6/ 9/ 11/- for FY22E/FY23E/FY24E respectively.
- The consensus target price of ₹ 787/- implies a PE multiple of 74x on FY24E EPS of ₹ 10.7/-.
- In the case of life insurance companies, the embedded value per share is the correct multiple for valuing the company. The consensus estimate of this metric is not available on any of the websites.
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