HDFC Life Insurance Company Stock Research Report

Strong execution underlines sustainability of healthy VNB growth….

HDFC Life (HDFCLI) reported 9%/14% YoY growth in VNB in Q3/9MFY25 with Q3 being highlighted by a 174bps QoQ improvement in VNB margin. This underlines the limited impact of surrender price hike and also reiterates the sustainability of ~15% VNB growth outlook. Operating performance remains strong, evidenced by: 1) growth in policy (2%/15% YoY in Q3/9MFY25); 2) increasing presence in tier-2/3 markets (contributing ~65% of APE in 9MFY25 vs. 58% in FY21); 3) improvement in persistency (13/61 month persistency improved to 87.3%/61.4% in 9MFY25 from 86.3%/53.5% in 9MFY24); and 4) diversified growth (non-banca grew by 13%/24% in Q3/9MFY25) and better product mix (growth of 27%/55% YoY in non par and 22%/28% YoY in retail protection in Q3/9MFY25). As the outlook of more than 15% VNB growth re-emerges from the challenges of open architecture, lower tax exemption and hike in surrender charges, we highlight the long-term compounding prospects of the stock/industry.

Upgrade to BUY (from Add); TP revised to INR 700

We factor in weighted APE growth of ~18%/13%/13% with VNB margins (calculated) of 26.1%/26.6%/27.1% for FY25E/26E/27E. This results in an EV of INR 746bn and core RoEV of 16.4% in FY27E. We value HDFCLI based on 2x FY27E EV per share (vs. 2.5x FY26E) and arrive at a revised TP of INR 700 (vs. INR 788 previously). The cut adequately factors in any possible regulatory risk ahead.

Downside risks include: 1) Growth headwind – as a combination of probable cut in IRRs in non-par segment, softness in credit protect due to moderation in unsecured disbursements (there is a decline of 7% YoY in group protection in 9MFY25) and lower traction in greater than INR 500k annual premium segment (continued impact of removal of tax exemption that came into effect from FY24); and 2) margin headwind from continued increase in ULIPs driven by buoyant capital markets (37% of individual APE in 9MFY25 vs. 32% in 9MFY24) and elevated competition in key segments of protection and non-par. Additional risks exist on the regulatory side, if there is a hike in corporate tax rate and/or restrictions in bancassurance.

Upside risks include: 1) Possible improvement in pricing environment post impact of regulations like hike in surrender charges. 2) Growth revival in non-par segment, which may be triggered by events such as rate cuts/drop in equity markets (~8% dip in Q3FY25). (3) continued strong execution on growth.

Financial Summary

Guidance maintained for FY25 on APE/VNB growth

Management has maintained APE growth guidance of ~18–20% for FY25. VNB growth guidance remains at ~15% for FY25 versus 9MFY25 VNB growth of 14%.

SURU (semi-urban and rural) focus is yielding results

Management highlighted growth from tier-2/3 cities remains strong, contributing ~65% of overall top line during 9MFY25 (vs. 58% in FY21). On NoP basis, tier-2/3 markets contributed ~75% of the business in 9MFY25. 13M persistency in tier-2/3 cities is ~84% and average ticket size is INR 89.3k (INR 87k in H1FY25) vs 102.5k for company. The company is building capacity for future growth with ~71% of new agent addition in tier-2/3 markets.

Protection growth has been fairly higher in tier-2/3 cities – in the range of 30%, compared to 20% in tie-1 cities (28% growth for company). Protection products are same but there is difference in terms of ROP/regular pay and other features. Focus remains on top quartile of tier-2/3 as ticket size difference in not much compared to tier-1.