HDFC Life Insurance Company - Steady quarter; margin outlook constructive - ICICI Securities

HDFC Life's Q4FY22 result checked against most parameters starting from VNB growth (28% for FY22), VNB margin (27.4% for FY22 and 29.4% for Q4FY22), near term as well as medium term outlook on margin/volumes. Lower variances and sensitivity also stand out. We continue to believe that balanced product mix and distribution channel combined with the execution track record offer high conviction of continued VNB CAGR of more than 20% for the company. Maintain BUY with target price of Rs756 (unchanged) based on FY24E EV of Rs411bn, 30x (earlier 35x) FY24 new business of Rs38bn (Rs33.2bn of FY23 earlier) and add Rs27 per share of Exide Life based on 1.5x FY24E EV of Rs5.7bn.

- Q4FY22 VNB margin improved to 29.4% (26.7% in Q3FY22). The margin improvement was driven by a combination of higher non-par (30% in Q4FY22 vs 27% in Q3FY22), higher annuity, higher priced sales of protection products and operating leverage.

- Decrease in solvency from 201% in FY21 to 176% in FY22 was driven by acquisition cost (impact of 13%) and covid impact (negative covid impact of Rs6.5bn). The company plans to raise Rs3.5bn subordinated debt which will increase solvency by 6%. It maintains total excess mortality reserve of Rs550mn as of now. The target solvency of the company is close to ~180%.

- There are levers for growth in VNB margin and outlook remains more than 20% of CAGR for VNB. Company aims to grow retail protection in double digits in FY23 driven by price stability, demand recovery and improvement in underwriting metrics. New product will help increase the non-par mix, which is currently 33%. The company introduced Sanchay Plus Fixed Maturity Plan (FMP) in FY22 which is a single premium fixed maturity guaranteed non-par product. It is already 15% of the total business (~50% of non-par book written in FY22). The lower risk and lower hedging requirement in this product will lead to more scope to increase the overall mix of non-par segment. This should aid margins. The operating leverage benefits should also help. Total expense (incl commissions) % of premium has declined from 17.7% in FY20 to 16.4% in FY21 and 16.5% in FY22.

- Impact of parent merger: HDFC Bank has asked the regulator (RBI) [Link] to increase stake in HDFC Life to 50% post-merger with HDFC Ltd. The benefits of the merger will be more aligned growth among companies with higher scope of up-sell and cross-sell. Separate units have already started working on these lines.

- Overall variances/sensitivities remain under control. (1) HDFC reported covid impact of Rs6.5bn in EV. (2) The sensitivity also remains under control. HDFC EV will be impacted by (-)2%/1.6% for 100bps change in reference rates. (3) With 10% decline in equity markets, HDFC EV will decline by 1.4%. (4) HDFC EV declined by Rs0.5bn due to economic variance in FY22. (5) There was a negative assumption change impact on VNB of 80bps due to increasing mortality assumptions.

Shares of HDFC Life Insurance Company Limited was last trading in BSE at Rs. 582.50 as compared to the previous close of Rs. 571.35. The total number of shares traded during the day was 221762 in over 6114 trades.

The stock hit an intraday high of Rs. 593.95 and intraday low of 574.05. The net turnover during the day was Rs. 130009839.00.