Q1FY24 Review: HDFC Life: Growth leadership; margin stability in focus

24 Jul 2023 , 02:02 PM

HDFC Life (HDFCLI) reported 1QFY24 results with 12% YoY growth in retail APE. Q1FY23 numbers have been adjusted for merger with Exide Life. ULIP was the key growth driver, forming 20.4% of total APE in Q1 after seeing some moderation in Q4, while a 300bps YoY uptick was witnessed in the share of Annuity products in retail APE. After a weak FY23, retail protection witnessed a strong YoY growth of 45%, while the strong momentum in Group Protection continued. VNB margins were at 26.2% in Q1, which although is an expansion on a consolidated basis, are below standalone HDFCLI margins for Q1FY23. As a result, VNB growth stood at 18% YoY for FY23. Analysts of IIFL Capital Services believe HDFCLI is set to grow its APE at 15% Cagr over FY23-25 led by broad based growth across product mix. It will be boosted by an increase in their counter share in the HDFC Bank channel with the Bank now becoming their parent company. Management expects FY24 margins to be similar to FY23 margins by the end of the fiscal year. Analysts of IIFL Capital Services forecast 16%/18% VNB/EV Cagr over FY23- 25. Analysts of IIFL Capital Services maintain 12-mth TP of 700. Valuations at 3.0x/2.5x on FY24/FY25 P/EV are at 31% premium to SBILI. HDFC Life remains a strong compounding story. Maintain ADD.

ULIP, Annuity drive growth; Retail protection encouraging: 

Growth in Q1 was led by ULIP (24% YoY), which witnessed a 2 ppt uptick in product mix basis retail APE. However, management expects this ULIP mix to correct going forward. Annuity mix witnessed a strong increase of 3 ppt YoY in Q1. Retail Protection trends remained encouraging, with YoY growth being over 45%, while Group Protection remained strong at 13% YoY. Among channels, banca was the fastest growing channel with 30% YoY growth in retail APE as the company starts gaining share in HDFC Bank.

Margins decline but neutrality maintained: 

VNB grew 18% YoY for Q1FY24, with VNB margins at 26.2%, being below Q1FY23 margins of the pre-Exide merger entity due to higher impact from fixed cost absorption. Management expects FY24 margins to remain in line with FY23.

Valuations at a premium to peers: 

Analysts of IIFL Capital Services forecast 16%/18% VNB/EV Cagr over FY23-25. Stock trades at 3.0x/2.5x FY24/FY25 P/EV, at 31% premium to SBILI, but a history of higher growth and RoEV may help sustain some premium, in their view. Maintain ADD. Key risk: Regulations.