Q2FY24 Review: HDFC Life: Year of consolidation and investments

16 Oct 2023 , 11:05 AM

HDFC Life (HDFCLI) reported Q2FY24 results with 7% YoY growth in retail APE. ULIP was the key growth driver, forming ~25.6% of the total APE in Q2, despite a sharp pick-up in Q1 as well. A 130bps YoY uptick was witnessed in the share of Annuity products in retail APE. After a weak FY23, Retail Protection witnessed the second straight quarter of strong YoY growth of ~61%. VNB margins were at 26.3%, which faced 70bps compression YoY. As a result, VNB growth stood at 4% YoY for Q2. Analysts of IIFL Capital Services believe HDFCLI is set to grow its APE at 14% Cagr over FY23-26; 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 13%/17% VNB/EV Cagr over FY23-25. They maintain 12-month TP of 710. At 2.9x/2.5x on FY24/FY25 P/EV, valuations are at an average 22% premium to SBILI. HDFC Life remains a strong compounding story. Maintain ADD. 

ULIP, Protection drive growth; Non-par moderates: 

In Q2, growth was led by ULIP (59% YoY) that witnessed 980bps uptick in product mix basis retail APE. However, management expects this ULIP mix to correct in future. Annuity mix grew 130bps YoY in Q2. Retail Protection trends remained encouraging with YoY growth at ~61%; while Group Protection was stagnant YoY. Among channels, banca was the fastest-growing channel with 20% YoY growth in retail APE, as the share in HDFC Bank channel continues to expand to 62% now, while agency was tepid at 1% YoY. 

Margins decline on mix change: 

For Q2FY24, VNB grew 4% YoY with VNB margins at 26.3%, being below Q2FY23 margins due to higher impact from fixed cost absorption. Management expects FY24 margins to remain in line with FY23, but expect it to start expanding again from FY25 onwards. Management reiterated that they will be able to grow APE at mid-teens, adjusted for ~Rs10bn one-time non-par sales in March’23. 

Valuations at a premium to peers: 

Analysts of IIFL Capital Services forecast 13%/17% VNB/EV Cagr over FY23-25. The stock trades at 2.9x/2.5x FY24/FY25 P/EV, at 22% premium to SBILI; but a history of higher growth and RoEV may help sustain some premium. Maintain ADD. Key risk: Regulations.