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HDFC Life Rating: Buy | Steady performance in the first quarter

Valuation premiums are not expected to compress further; ‘Buy’ retained with revised target price of Rs 660

Well-balanced product mix and channel/distribution strengths allow it to maintain a steady growth profile (individual APE growth of 19% y-o-y – 17% four-year CAGR).
Well-balanced product mix and channel/distribution strengths allow it to maintain a steady growth profile (individual APE growth of 19% y-o-y – 17% four-year CAGR).

HDFC Life’s Q1FY23 results were largely steady, with continued traction in non-PAR and recovery of credit life supporting margins. VNB margin expanded 60bp y-o-y to 26.8% aiding 25% y-o-y VNB growth. Well-balanced product mix and channel/distribution strengths allow it to maintain a steady growth profile (individual APE growth of 19% y-o-y – 17% four-year CAGR).

Over the past 2-3 years, operating parameters for peers have converged with HDFC Life, leading to valuation premiums compressing to 38% vs 110% in the past 16 months (since Apr-21). We believe that headwinds are emerging, with growth moderating and VNB margins peaking. In that context, HDFC Life’s distribution strength and well-balanced product suite will support consistent delivery both in market share and margin profile. Hence, we find current valuations at 2.6x Jun-24 EV reasonable for a superior franchise and do not expect valuation premiums to narrow further. We maintain Buy with TP trimmed to `660 implying 3.1x/25x Jun-24F EV/VNB (unchanged).

Balanced growth: Individual APE grew 19% y-o-y (total APE up 22% y-o-y). APE growth was more balanced, with 25/12% growth in PAR/linked business, while it remains dominated by non-PAR savings/annuity which grew 31%/39%. Protection mix improved 120bp y-o-y (APE up 31% y-o-y), and was supported by 83% y-o-y growth in group protection APE (largely credit life led – up 96% y-o-y) while retail protection declined 34% y-o-y (41% y-o-y decline for IPRU).

Steady improvement in margin profile: Unlike IPRU, we think HDFC Life’s margin expansion is steady and much more balanced. VNB margin expanded 60bp y-o-y to 26.8% (27.4% in FY22), though an increasing cost ratio capped margin expansion (60bp drag on margins). Improvement is led by product mix, especially with the shorter-duration non-PAR (Sanchay FMP), allowing the non-PAR mix to improve to 35% and 83% y-o-y growth in group protection. Retail protection continues to decline (down 34% y-o-y) – we strongly believe that demand has weakened given the sharp price increase in the segment during the pandemic. We build in 16%/19% APE/VNB CAGRs over FY22-25F.

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