Q4FY24 Review: HDFC Life: Weak margins but FY25 outlook is positive

19 Apr 2024 , 12:27 PM

HDFC Life (HDFCLI) reported Q4FY24 results with a 6% YoY decline in retail APE. ULIP remained strong, forming ~37% of total APE in Q4, registering a growth of ~1.4x YoY. Retail protection recorded a modest ~6% YoY growth. This was offset by weakness in the traditional savings segments, largely due to the Rs10bn one offs in Q4FY23, attributable to the pent up selling of Non-par products. VNB margins were at 26.1% in Q4, declining by 320bps YoY due to change in new business profile and low fixed cost absorption. Management continues to remain focused on VNB growth driven by APE growth, and is willing to trade incremental margins for better growth opportunities. Management expects the private sector to record 12-15% growth in FY25, and aspires to record growth at the upper end of this range. Analysts of IIFL Capital Services believe HDFCLI is set to grow its APE at 15% Cagr over FY24-26 given the favourable base of FY24, and increase in the counter share in HDFC Bank. Analysts of IIFL Capital Services forecast 18%/16% VNB/EV Cagr over FY24-26. They fine tune 12-month TP to Rs710 (from 720) on lower VNB margins. HDFC Life remains a strong compounding story. Maintain ADD.

Continued strength ULIP; Retail protection resilient:

ULIP (~1.4x YoY) continued to witness a sharp uptick, with retail APE mix increasing by ~25ppt YoY, owing to buoyant capital markets. Retail Protection remained resilient, recording modest ~6% YoY growth. This was offset by weakness in the Non-par (including annuities) segment (-35% YoY). Among channels, Banca recorded ~19% YoY growth in retail APE with share in the HDFC bank channel at 63% for FY24. Agency witnessed a decline of ~29% YoY. Heading into FY25, management remains confident on its ability to grow at the top end of the expected private sector growth rate of 12-15%, if not faster.

Margins decline on lack of operating leverage:

VNB margins were at 26.1% for Q4FY24, declining by 320bps YoY, driven by lack of operating leverage and change in new business profile. HDFCLI continues to focus on VNB growth driven by APE growth and is willing to trade incremental margins for better growth opportunities.

Valuations at a premium to peers:

Analysts of IIFL Capital Services forecast 18%/16% VNB/EV Cagr over FY24-26. Stock trades at 2.4x/2.0x FY25/FY26 P/EV, at a 9% premium to SBILI, but a history of higher growth and RoEV may help sustain the premium to some extent. Maintain ADD. Key risk: Regulations.