MOSL: HDFC STANDARD LIFE INSURANCE (INITIATING COVERAGE)-Another 'compounder'-Quality franchise-attractive valuations

​HDFC STANDARD LIFE INSURANCE (INITIATING COVERAGE): Another 'compounder'; Quality franchise; attractive valuations

(HDFC STANDARD LIFE, Mkt Cap USD8.9b, INR290, TP INR370, 28% Upside, Buy)

HDFC Standard Life (HDFCSL) is one of India’s top three private sector life insurers and offers a wide range of insurance products. It has strengthened its position in a highly competitive industry and has a well-diversified business mix. HDFCSL has strong return ratios (FY17 RoEV at 21%) and the highest new business margin (22% for FY17) among the major private insurers, backed by its balanced product mix (47% ULIPs, 26% PAR, 27% Non-Participating business in FY17), strong distribution network and lower operating cost. HDFCSL has made significant investments in building its digital platform, which has enabled it to improve customer satisfaction and attract new business. We estimate HDFC SL to deliver RoEV of ~19% over FY17-20E and value it on 3.5x Mar-20E EV at INR370 per share, which implies an upside of 28% from the issue price. Initiate coverage with BUY.

New business premium to grow at 25% CAGR over FY17-20E

HDFC SL has reported strong growth trends, which has enabled it to consistently rank among India’s top three private insurers. We expect the company to deliver 25% CAGR in new business APE over FY17-20. This will be aided by aided by its increasing bancassurance tie-ups, improvement in agency channel and higher direct sales.

Diversified product mix, improving operating metrics to keep margins buoyant

HDFC SL has a balanced product mix between participating, non-participating and ULIP products. It has steadily improved the share of high-margin protection products to 26.4% as at Sep-17, which has helped it deliver higher new business margins. Its diversified product portfolio and continued improvement in operating metrics (persistency, productivity) will keep margins/return ratios buoyant.