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MOSL: HDFC LIFE INSURANCE (Buy)-Business momentum remains strong; VNB growth accelerates

HDFC LIFE INSURANCE: Business momentum remains strong; VNB growth accelerates

(HDFCLIFE IN, Mkt Cap USD14.9b, CMP INR509, TP INR535, 5% Upside, Buy)

 

• HDFCLIFE reported strong ~29% YoY growth in net premium income, led by a 47% YoY increase in new business premium. Shareholder earnings increased 12% YoY to INR4.3b, which is 4% below our estimate due to higher new business strain, though back-book surplus increased 27% YoY.
• Individual APE increased 64% YoY, led by term/annuity APE growth of 63%/69% YoY. The share of the non-par savings business in individual APE increased sharply to 63% from 11% last year due to the success of the 'Sanchay Plus' product. The composition of ULIPs/PAR, thus, declined to 26%/6% (54%/28% in 1QFY19). Renewal premium growth moderated to 10% YoY (v/s 17% YoY in FY19), though the persistency ratio improved across both the 13M/61M cohorts.
• New business margin improved sharply to 29.8% (v/s 24.6% in FY19), while operating ROEV stood at 19.9%. VNB, thus, grew by a robust 104% YoY to INR5.1b. HDFCLIFE made additional disclosure highlighting that, in the non-par business, while the VNB margin is not sensitive to the interest rate, the impact on EV in case of a 100bp decline in interest rate will be only 0.5%.
• The share of the term protection business increased to 18% in total APE (5.5% on an individual APE basis), while the annuity business contributed 4% of total APE (1% in FY17). On an un-weighted basis, annuity and term together accounted for 44% of total NBP v/s 26% in FY17.
• Total commission expense increased by 63% YoY (in-line), while operating expenses were up by 22% YoY. Total expense ratio, thus, stood at 18.4% v/s 16.9% in FY19. Share of direct channel in individual APE increased further to 20%, while the cross-sell rate improved to 9.6%.
• Other highlights: (i) AUM grew 18% YoY to INR1.3t and the equity proportion was flat QoQ at 38%. (ii) Solvency ratio improved to 193% from 188% in FY19. (iii) Credit protect grew 21% on an NBP basis, despite NBFC slowdown.
• Valuations and view: HDFCLIFE has reported strong acceleration in business growth, while the improving asset mix has driven a sharp improvement in the VNB margin. The company sees significant potential in the annuity/protection business and expects a further improvement in product mix, which should support profitability. We revise our new business growth estimate, and expect HDFCLIFE to deliver ~30% CAGR in new business APE over FY19-21, while margins are likely to sustain at healthy levels of 28%. We, thus, estimate 37% CAGR in VNB over FY19-21, with operating RoEV/RoEV improving to 23%/20%. We value HDFCLIFE at INR535 per share (4x FY21E EV). Maintain Buy.