HDFC Life: Growth drivers in place to deliver a strong H2

22 Nov 2023 , 11:19 AM

Recommendation: Add; Target price: Rs 710

Analysts of IIFL Capital Services recently interacted with HDFC Life (HDFCLI) to get an update on the business. Although Q2 was a muted quarter, in terms of APE growth (7% YoY), they reiterated confidence in returning to midteen growth on a full-year basis (excluding the Rs10bn one-offs in non-par). Policies having annual premium of Rs500k were impacted due to the new tax policy. New product launches, expansion of distribution footprint, and rise in the share of HDFC Bank’s channel — will be the key growth drivers. Management also reiterated their objective of maintaining margin neutrality, and drive VNB expansion through APE growth in FY24. The new EOM regulations have not impacted them, but have increased the flexibility of payouts. Analysts of IIFL Capital Services forecast 13%/17% VNB/EV Cagr over FY23-25. They maintain 12-month TP of Rs710. HDFC Life remains a healthy compounding story; maintain ADD. 

HDFC Bank channel faring better than expectations: 

Post the bank’s merger, HDFCLI has benefitted tremendously as their counter share in the HDFC Bank channel has risen to ~62% for H1FY24, from 56% in FY23. The speed of progress has been better than expectations, with both branch presence and product mix being reviewed. The bank’s branches have been aggressively pitching HDFCLI’s products. This has further helped expand the share and they could achieve 70% share in early FY25, in analysts of IIFL Capital Services view. 

Lack of operating leverage a drag on margins: 

H1FY24 saw a flat performance on the VNB margin front. While lower Non-par mix has been an issue, volumes being lower than the built-in capacity have resulted in a drag on margins. Better volumes in H2 can help improve margins. Planned product launches in the Non-par segment and tactically pushing higher PPT variants will also help boost margins resulting in flat VNB margins in FY24. 

Need for diversification renews interest in Agency: 

Although the costs associated with Agency channel are higher, the ability to control the channel is better vs partnership distribution channels. Stress in other channels has also led LI players to focus more on Agency. Focus is on policy volume growth as well, given the new regime; as a large part of growth is now coming from NOP growth. Analysts of IIFL Capital Services will also watch out for new product launches to drive growth and margins in 2024. Maintain ADD. Risks: Regulations.