A weaker retail protection performance in Q3FY21 (down 17%/28% YoY/QoQ) has been well managed through improvement in segments like ULIP, credit protect and non-par/participating savings. As such, HDFC Life's (HDLI) 9MFY21 VNB is flat YoY at Rs14.1bn, which we think is a commendable performance given the impact of Covid. Growth levers ahead include: 1) ULIP revival, 2) improvement in credit protection, and 3) new protection product launched in Q4FY21.
- Is dip in retail protection a concern? Not really, considering that protection demand was weak at the industry level in Q3FY21. However, HDLI has ably managed to balance this with growth in other segments (Q3FY21 total APE ex-protection growth of >22% YoY).
- Volume growth and credit life offset the dip in retail protection to maintain VNB margins: ULIP APE has improved from Rs2.9bn in Q1FY21 to Rs3.6bn in Q2FY21 and Rs4.2bn in Q3FY21. Credit protect (NBP basis) has also witnessed steady recovery from Rs2.4bn in Q1FY21 to Rs7bn in Q2FY21 and Rs10bn in Q3FY21. Total protection grew at a marginal rate of 1% in Q3FY21 as sharp fall in retail protection (48% YoY) got offset with robust growth in group protection (39% YoY). Retail/group protection APE was Rs1.2bn/Rs0.4bn in Q1FY21, Rs.4bn/Rs1.1bn in Q2FY21 and Rs0.7bn/ Rs2.4bn in Q3FY21. Basis total APE, individual non-par savings has grown 6% /(-)32% in Q3/9MFY21, par savings has grown 122%/186% in Q3FY21/9MFY21 while annuity has grown 49%/33% in Q3/9MFY21. Operating performance has improved with persistency improving in 4 out of 5 cohorts while the 9MFY21 cost ratio ((commission + Operating expenses)/ total premium (including renewals)) stood at 16% which is lower than 18.5% in 9MFY20.
- Banca has been a clear outperformer, agency picking up: Banca individual APE has progressively grown to Rs6.3bn/10.7bn/8.6bn in Q1/Q2 /Q3FY21 while agency APE has clocked Rs1.3bn/2.4bn/2.8bn during the respective periods.
- New product launched in protection: This is a term plan that provides flexibility to auto balance death and critical illness cover or receive income payouts from age 60. This product has already been launched and can result in growth in protection/margin in H1CY21. Evolving trends have favoured protection products with some form of added saving elements and this product can fit well in that format.
- Downgrade from Buy to ADD. We factor VNB margin of 26.4/28/30% with APE growth of 3%/18/15% in FY21E/FY22E/FY23E. We expect HDLI to accumulate Rs54bn of new business and Rs41bn of unwind (@ 7.5%) over FY22E/FY23E to reach Embedded Value (EV) of Rs348bn by FY23E. We value HDLI based on 40x new business value of Rs30bn in FY23E to arrive at the target price of Rs767. At our target price, HDLI will trade at 4.4x FY23E P/EV.
Shares of HDFC Life Insurance Company Ltd was last trading in BSE at Rs.687.65 as compared to the previous close of Rs. 700.65. The total number of shares traded during the day was 169948 in over 8946 trades.
The stock hit an intraday high of Rs. 708.3 and intraday low of 684.25. The net turnover during the day was Rs. 117781926.