Apart from marginal shift from non-par to par and annuity products, business mix remained fairly stable q-o-q. The company reported a VNB margin of 25.9%, up 130 bps y-o-y, but down 70 bps q-o-q.
HDFC Life reported a mere 1% y-o-y growth in NBP in Q4FY20. Market share, however, improved 170 bps to 14.2% in FY20 (individual WRP basis) as it outperformed the broader industry; under growing pressure on the ULIP segment due to the lockdown and fairly weak equity sentiments.
Apart from marginal shift from non-par to par and annuity products, business mix remained fairly stable q-o-q. The company reported a VNB margin of 25.9%, up 130 bps y-o-y, but down 70 bps q-o-q. Persistency ratios remained stable with slight improvement in a few buckets q-o-q. However, maintaining these ratios will pose a significant challenge, especially in the ULIP segment, with expected heightening capital market apathy amongst customers. The company’s disclosure of the Milliman report on non-par savings products builds incremental confidence on interest rate risks. Our target multiple of 3.5x FY22E P/EV continues to include a 10% premium for the inherent value creation opportunities not captured by HDFC Life’s current core.
Maintain ‘hold’ with a TP of Rs 470.
In order to preserve solvency capital, which was marred 10% due to the adverse equity market movement, no dividend was declared for FY20. An enabling resolution to raise Rs 600 crore of tier-II capital has been approved to ensure capital is not a constraining factor to grow, especially in pure protection, where demand should pick up as wallet share inevitably tracks its new ‘mind share’ given the pandemic-driven mindset reset. Operating assumptions have become tighter as near-term pressure on ULIP persistency builds.
A Covid-19 reserve of Rs 40 crore has been created to deal with the increased mortality rate. Despite incorporating all these and adverse impact of DDT changes, reported ROEV of 18.1% for FY20 is impressive. The stock trades at 4.3 FY21E P/EV, by far the most expensive player in the life insurance space, thanks to a much higher margin and growth compared to competition along with a stronger brand at play.