Q3FY24 Review: HDFC Life: Challenging FY24, but FY25 looking up

15 Jan 2024 , 01:31 PM

HDFC Life (HDFCLI) reported Q3FY24 results with a weak 1% YoY growth in Retail APE. ULIP remained strong, forming ~33% of total APE in Q3 and registering a growth of ~86% YoY. Retail Protection continued to witness traction, recording a strong YoY growth of ~34%. This was offset by weakness in the Traditional Savings segments. VNB margins were at 26.8% in Q3; remaining flat YoY on a quarterly as well as YTD basis. As a result, VNB declined by 2% YoY in Q3. Analysts of IIFL Capital Services believe HDFCLI is set to grow its APE at 17% Cagr over FY24-26, given the favourable base of FY24, new product launches and increase in their counter share in HDFC Bank channel with the Bank now becoming their parent company. We expect margins to decline YoY in Q4, owing to the tougher base; driven by pent-up selling of Non-par products in Q4FY23. Analysts of IIFL Capital Services forecast 18%/16% VNB/EV Cagr over FY24-26. They cut 12-month TP to Rs700 (from 710) on lower VNB growth assumptions. HDFC Life remains a strong compounding story, but FY24 aspiration on APE growth and margins is challenging. Maintain ADD. 

Continued traction in ULIP and Retail Protection: 

ULIP (~86% YoY) continued to witness a sharp uptick with retail APE mix increasing by ~17ppt YoY; owing to the buoyant capital markets. Retail Protection trends remained encouraging (~34% YoY). This was offset by weakness in the Non-par (including annuities) segment (-33% YoY). Among channels, Banca recorded ~6% YoY growth in retail APE with share in the HDFC Bank channel in the mid-60s range. Agency growth was modest, too, at ~7% YoY. Management stated that HDFCLI is aiming for a double-digit growth in retail APE in Q4, adjusted for ~Rs10bn one-time Non-par sales in March’23. 

Margins remain flat; unfavourable base for Q4: 

VNB margins were at 26.8% for Q3FY24, remaining flat YoY as gains from change in new business profile was offset by lower fixed cost absorption. Analysts of IIFL Capital Services expect margins to decline YoY in Q4, owing to the pent-up selling of Non-par products in Q4FY23 due to introduction of taxation; resulting in FY24ii margins at 27.3% (-20bps YoY). 

Valuations at a premium to peers: 

Analysts of IIFL Capital Services forecast 18%/16% VNB/EV Cagr over FY24-26. The stock trades at 2.9x/2.5x FY24/FY25 P/EV, at 13% premium to SBILI, but a history of higher growth and RoEV may help sustain some premium, in our view. Maintain ADD. Key risk: Regulations.