The upward trajectory in VNB margin to continue – HDFC Life

The upward trajectory in VNB margin to continue – HDFC Life

Update on the Indian Equity Market:

On Tuesday, NIFTY50 snapped its five-day losing streak amid a volatile session. The index closed at 17,278 (+0.8%) as investors await more financial results in India and the outcome of the Fed Reserve meeting scheduled on Wednesday.

Among the sectoral indices, PSU BANK (+4.2%), AUTO (+2.3%), and MEDIA (+2.2%) led the gainers. IT (-0.3%) was the only sector which ended in the red. Among the stocks, MARUTI (+7.4%), AXISBANK (+6.5%), and SBIN (+3.9%) led the gainers while WIPRO (-1.6%), BAJAJFINSV (-1.4%), and TITAN (-1.2%) led the laggards.

Excerpts from an interview of Ms. Vibha Padalkar, MD& CEO, HDFC Life with Economic Times dated 24th January 2022:

  • HDFC Life reported 3QFY22 earnings, and all channels reported growth. In terms of the product mix, after 2 quarters’ lull, the individual protection grew by 20% YoY. Annuity continues to do well and reported 39% YoY growth.
  • On a standalone basis, the VNB margin (a profitability measure) has increased from 26.4% to 26.8% due to higher volumes and a balanced product mix. The CEO believes the upward margin trajectory will continue.
  • COVID-19 claims have reduced significantly in 3QFY22. From the peak of Rs 3,000mn claims in 2QFY22, the claims were reduced to Rs 170mn in 3QFY22. Due to the ongoing Omicron wave, the company has strengthened its mortality reserves and is carrying Rs 1,550mn of extra reserves.
  • The company has hiked its prices by 15-25%, which it believes was necessary. While the retention amount has increased, there was no impact on the solvency as reserves were carried at higher levels. Ms. Padalkar believes that price hikes for life insurance products and health insurance products are bound to happen due to inflation.
  • The solvency ratio was 190% before the cash payout for the Exide Life acquisition. The solvency was over 200% in 3QFY21, which was more of an aberration. The company maintains solvency in the 190-195% zone. She expects profits generated in 4QFY22 will add to the solvency of the company. Second, they have raised Rs 6,000mn as subordinated debt. If the need be, they can increase the subordinated debt levels.
  • The first step of the Exide Life merger with HDFC Life is complete. The next step is about 9months to a year away when the full integration happens and HDFC Life will be able to enjoy synergies. It will add 30-35% to the company’s agency channel and deepen its presence in South India and tier two and three towns.
  • The CEO believes the third wave has peaked in several parts of India indicating demand and all the macro indicators are robust. People’s attitude towards insurance has changed.
  • A lot of people reaching retirement age are thinking about getting annuity plans as they realise they will outlive their retirement age by ~20 years or more. The company’s retirement focus campaigns are also enlightening people.
  • The company is very close to its ideal product construct which is about a third unit-linked, about third participating products, and the balance non-participating savings products.

Asset Multiplier comments:

  • The insurance sector is a multi-decadal opportunity in India due to the under penetration and protection gap.
  • We believe the Company has maintained significant provisions to provide for claims expected due to the third wave. This coupled with a dynamic and balanced business mix, protection business strategy, and the expected pickup in agency business augurs well for the growth of the company.

Consensus Estimate: (Source: Market screener website)

  • The closing price of HDFC Life was ₹ 630/- as of 25-January-2022.  It traded at 94x/ 72x/ 62x the consensus EPS estimate of ₹ 6.7/ 8.7/ 10.2/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 787/- which implies a PE multiple of 77x on FY24E EPS of 10.2/-.
  • 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.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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