There’s decent upside in HDFC Life stock

Guidance of premium growth gives confidence; analysts’ target prices are upwards of ~600

HDFC Life declared its FY22 results, which were slightly better than the consensus but in line with most expectations. It reported 17 per cent YOY growth in annualised premium equivalent (APE) in 2021-22 to ~9,760 crore and 22 per cent YOY growth in value of new business (VNB) to ~2,680 crore (standalone).

Net premium is ~45,396 crore for 2021-22, versus ~38,122 crore in 2020-21. Income from investments was ~19,215 crore in FY22 versus ~32,677 crore in the previous. The VNB margin for FY22 stood at 27.4 per cent (130 bps rise YOY) versus 26.5 per cent for the first three quarters, indicating a rise in Q4. The two-year CAGR of 17 per cent in RWRP (retailweighted received premium) was almost double the 9 per cent CAGR for the industry and higher than the 14 per cent CAGR EX-LIC. The merger of Exide Life is expected to be completed in 2022-23, according to the management guidance.

The standalone operating ROEV (without Exide) in FY22 was 16.6 per cent, which showed a decline from 19.1 per cent last year, a 2.5-percentage point impact from excess mortality on account of Covid-19. The EV for 202122 stood at ~30,050 crore, after paying out ~726 crore in cash to Exide Life promoters for the acquisition. The return on embedded value (ROEV) for FY22 stood at 16.6 per cent. If we exclude the impact of excess mortality reserve, the ROEV was 19 per cent, around 50 bps higher than the previous year.

The solvency margin stood at 176 per cent, a decline from 190 per cent after the first three quarters and lower than 201 per cent in 2020-21. The cash payout to Exide Life promoters accounts for about 13 per cent of the decline. Another 11-12 per cent of the decline was due to excess mortality charges of ~650 crore due to Covid-19. If these two factors are adjusted, the solvency ratio seems reasonable.

The board has approved a proposal to raise up to ~350 crore in non-convertible debentures (NCD) – this should boost the solvency ratio by 6 per cent. The management remains open to raising more capital via a mix of debt and equity. The targeted solvency ratio for 202223 is 180 per cent, which shall be achieved if the NCD issue is made.

The guidance was confident about achieving APE growth at a rate that was twice the real GDP growth. According to the management, the HDFC-HDFC Bank merger should increase the scope for cross-selling and also cost reductions. The market value-to-embedded value ratio should be roughly 4x -- more if we consider HDFC Life standalone, without Exide Life. That’s higher than SBI Life (roughly 3.5x) and ICICI Prudential Life (2.6x).

In terms of sequential trends, individual protection APE of ~155 crore was up 64 per cent QOQ in Q4 but down 9.7 per cent YOY. Other parts of individual segments like annuity, par, and non-par savings rose 20.5 per cent, 20.5 per cent, and 15 per cent QOQ, respectively. But group business was sluggish, growing 2.5 per cent QOQ.

The merger would mean that the entire 47 per cent stake of HDFC Limited in HDFC Life would be transferred to HDFC Bank. Sebi approval has been sought to take the stake of HDFC Bank in HDFC Life to 50 per cent. The management cautiously welcomed the LIC IPO, pointing out that the average ticket size/ policy for HDFC Life is 4x that of LIC.

The stock has been flat after results. At the current price of ~547, there could be a decent upside if analysts’ targets of ~605 (12 months) or ~690 (June 2023) are achieved.