Key takeaway: During our interactions with the CEO & CFO of HDFC Life, management indicated expectation of 17-18% growth in premiums and scope to expand margins from 27% over 9MFY22 to ~30% over 3-5 years. Merger with Exide Life is on track and will drive synergies from FY24. Protection sales were affected by supply constraints and tighter reinsurance stance, but can normalise in 6-12 months with limited impact on margins & solvency.
We retain ‘buy’ with TP of 820. Balanced high-teens growth with focus on underwriting: Management expects HDFC Life to sustain 17-18% growth in premiums over the medium term and will maintain a balanced mix across ULIPs / Par / Non-Par on savings and protection businesses. In the retail protection business, softness was due to combination of client aversion to visit diagnostic centres & cautious view of reinsurers due to higher mortality outside tier-1 markets. Growth here should pick-up as client aversion is receding and recent initiatives to facilitate tests can aid growth.
The guarantee-return business is fully hedged and won't see impact based on recent changes in yields. Changes in protection strategy should be neutral to margins and solvency: With the change in reinsurance pricing, HDFC Life has raised the limit on taking reinsurance from2 million of sum assured to 4 million and raised pricing for the term insurance. This transition has raised pricing by 15-20% and should be neutral to margins. Moreover, higher retention won't drag solvency as Indian regulations weren’t anyway giving full credit for reinsurance. Merger with Exide Life on-track & scope to expand margins: Exide Life has become a subsidiary of HDFC Life and post approval from NCLT, it will be merged during FY23. As highlighted in our note, the merger lifts EV by 10% and expands agent network by ~35%. In fact, there is limited overlap between the two on network and agency network.
In FY23, post-merger margins should be flattish and thereafter should expand towards 30% mark over next 3-5 years with rise in share protection & cost synergies. Maintain ‘buy’: We see HDFC Life delivering 18% CAGR in VNB over FY22-24 and operating ROEV of 19% (without merger). Premium change would have linear linkage with VNB. Standard Life has 3.7% stake in company and potential for sale is an overhang, but actual liquid part could be about 2% as IRDAI norms require combined shareholding of promoters to be 50% against ~52% currently. Valuations at 3x FY23 P/EV are attractive and we rate stock as ‘buy’ with target price of820 based on 4.1x Dec-23 P/EV. Receding overhang around LIC’s IPO (fund-flows) can be trigger for re-rating of valuations.