VNB CAGR of 19% estimated over FY21-24; ‘Buy’ retained with TP lowered to Rs 800
HDFC Life front-ended excess mortality reserve (EMR) of Rs 7 bn which is ~5x of net Covid claims of FY21. While management guides reserves should be adequate to meet wave-2 Covid claims, it is mindful of potential third wave. Higher reserves impacted Op ROEV. VNB grew 40% y-o-y to Rs 4.1 bn, largely in line with estimates, aided by a 30% rise in APE and ~200bps y-o-y margin expansion to 26.2% (vs 25.9% estimate). We see a 19% VNB CAGR over FY21-24 with 18% FY23 ROEV. Buy.
Sharp increase in Excess Mortality Reserve: HDFC Life created an EMR of Rs 7 bn in Q1FY22 (including Rs 690 mn from unutilised Covid reserves) – this is large vs Rs 1.5 bn of net Covid claims in FY21 and Rs 1.7 bn of reserves created at the end of FY21. This impacted operating ROEV, which moderated to 14.4% (-140bps y-o-y/ -410 bps q-o-q). EMR+estimated Covid claims in Q1FY22 together would account for ~3% of FY22 EV on gross tax basis. However, it has not altered its long-term mortality assumptions. It expensed the net reserve accretion in Q1FY22, impacting net profit which declined 33% y-o-y to Rs 3 bn. Mgmt guides that the peak of individual claims is behind and the current level of provisioning is sufficient for excess death claims. However, any surge in claims due to a potential third Covid-wave remains a monitorable.
In-line VNB growth on low base: HDFC Life’s Q1FY22 VNB rose in line by 40% y-o-y to Rs 4.1 bn on low base (2yr Cagr of -10%), led by a 30% growth in APE (2yr Cagr of -4%) and margin expansion (~200bps y-o-y owing to favourable product-mix). Group protection more than tripled on a very small base riding on strong growth in credit protect. Non-par also saw good growth of 39% y-o-y, and aided margins. Other Saving products (ULIP/Par) saw moderate growth, while retail protection expectedly weakened (-10% y-o-y) as HDFC Life adopted stringent underwriting.
Demand for retail protection in Q1 has stayed strong, but HDFC Life has been converting 60-65% of policies vs. 80-85% in normal times. Going forward, retail protection should grow with Covid restrictions largely lifted, though its approach will be calibrated. Most channels saw good growth, with broker and agency leading the growth on smaller bases. During the quarter, it struck a new partnership with ICICI Securities and TVS Credit.
Persistency trends strong: Persistency was stable/better across buckets over Q4FY21 with 13th month persistency staying strong at 90% while 61st month stayed steady at 53%, with significant improvement y-o-y. Solvency ratio at 203% was above the regulatory requirement, and also better y-o-y and q-o-q. We maintain our Buy rating with a price target of Rs 800 based on 4.4x Jun-23e Price/EV.