HDFC Life Insurance (HDFC Life) is among the dominant private players in the Indian life insurance space today. It was established in 2000, as a joint venture between HDFC Ltd and Standard Life. The company is one of the most profitable in the industry and has gradually shifted from Ulip heavy to a more balanced product mix. HDFC Life has a strong distribution network with partnerships ranging from banks (includes HDFC Bank), NBFCs, MFIs and new age distributors. Diversified product portfolio and focus on product innovation has enabled HDFC Life to be ahead of the curve.
Healthy, consistent business performance
HDFC Life is focused on delivering consistent profitability with steady growth. GWP has grown at 17.1% CAGR in FY15-20. Value of new business (VNB) saw growth at 26.6% CAGR in FY15-20 while VNB margin expanded ~740 bps to 25.9% in FY20 from 18.5% in FY15. PAT posted ~10.5% CAGR in the past five years to Rs. 1295 crore for FY20. The company has a healthy RoEV at 18.1% for FY20 and has remained at ~20% mark in the past few years. We expect PAT to grow at 8.9% CAGR to Rs. 1671 crore in FY20-23E.
Profitable, prudent product mix...
Continued focus has led to rebalancing of the portfolio in favour of high margin business, thus reducing concentration in any one category of product. As on September 2020, HDFC Life's product mix contribution is now at Ulip - 20%, par - 28%, non-par - 26%, term - 12%, annuity - 5%.
...along with focus on opex leads to superior margin
A prudent product mix with a substantial proportion of high margin products (protection, non-par) enables the insurer to consistently report margin improvement from 18.5% in FY15 to 25.1% in FY20. The steady improvement in persistency and control on opex can also attributed to sustained increase in margin and is seen stabilising at 25.2% by FY22.
Superior fundamentals to keep valuation at premium
We expect gross written premium (GWP) to grow at a CAGR of 10.1% in FY20-23E to Rs. 43703 crore. PAT is expected to grow at 9% CAGR over the same period to Rs. 1671 crore. VNB margins are expected to be in the region of ~25% by FY23E. HDFC Life currently trades at ~4.3x FY23E embedded value (EV), which is at a premium compared to its peers. Given the superior business franchise and continued focus on profitability, valuations are expected to remain at a premium. Considering the current business franchise and building anticipated improvement in business momentum and profitability metric, we initiate coverage on the stock with a BUY rating and a target price of Rs. 820/share, valuing the company at 5.0x FY23E EV.
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Shares of HDFC Life Insurance Company Ltd was last trading in BSE at Rs.704.35 as compared to the previous close of Rs. 718.6. The total number of shares traded during the day was 101539 in over 4960 trades.
The stock hit an intraday high of Rs. 723.5 and intraday low of 702.8. The net turnover during the day was Rs. 72168723.