HDFC Life shares gain 2% after Q4 earnings: Should investors buy, sell or hold?

Shares of HDFC Life Insurance Company gained over 2 percent intraday on April 28 after the company reported weak growth in premium and decline in solvency ratio in the quarter ended March 2020.

The stock has rallied 45 percent in a little over a month and was trading at Rs 489.50, up 0.97 percent on the BSE at 1348 hours IST.

The private life insurer posted a 14.5 percent year-on-year decline in consolidated net profit for Q4FY20 at Rs 311.65 crore, impacted by a drop in net investment income and a rise in provisions, though both annualised premium equivalent (APE) and the value of new business (VNB) saw double-digit growth in FY20.

Company's net investment income turned into red, coming negative at Rs (-10,229.92 crore) during the quarter compared to an income of Rs 3,755.65 crore in the same period last year.

Provisions for diminution in value of investments also increased significantly to Rs 375.85 crore in the quarter ended March 2020, compared to Rs 17.32 crore in the corresponding period last year.

While maintaining buy call on HDFC Life and raising price target to Rs 730 (from Rs 640 per share), CLSA said protection and non-par savings were key growth drivers and 25 percent YoY value of new business (VNB) growth led to 130 bps of margin expansion YoY.

However, the weakness in equity markets and lockdowns impacted Q4 premiums, and 10 percentage point decline over February-March 2020 in the solvency ratio is concerning, it added.

The brokerage sees a 19 percent FY20-22 embedded value CAGR, supported by a capital raise and forecast 13 percent FY20-22 VNB CAGR.

JM Financial also retained buy call on the stock with a target of Rs 540 per share after the life insurance company reported embedded value of Rs 20,700 crore as of March 2020, a growth of 13 percent YoY driven by 25 percent YoY growth in new business value (NBV).

VNB is the present value of expected future earnings from new policies written during a specified period and it reflects the additional value to shareholders expected to be generated through the activity of writing new policies during a specified period.

The insurer continued to report industry-leading margins which came in at 26 percent for FY20, up 70bps QoQ / 130bps YoY aided by balanced product mix (+1.4 percent contribution) however the benefit was offset by a change in operating assumptions (-0.6 percent) as the insurer strengthened its persistency and mortality assumptions.

During the quarter, the insurer made an additional Rs 40 crore (equivalent to 4,500 lives) COVID-19 related mortality reserves. This is over and above the policy level liabilities.

Vibha Padalkar, MD & CEO, HDFC Life, in the post-earnings call that the insurer had an impact of Rs 1,100 crore in the premium collection (new business and renewal) in the last 15 days of March 2020 to Coronavirus-related lockdown. Of this, Rs 400-500 crore impact was on the first year premium.

The company is also assessing future scenarios of COVID-19 lockdown including one scenario some branches could operate as one-man operations. Padalkar however clarified that there would not be any job cuts.

"We are looking at various scenarios depending on the lockdown. Given that we are able to service customers largely through working from home, then we might look at one-man branches. This means that I don't need that infrastructure. But that is nowhere on the horizon immediately," she added.

APE performance for HDFC Life has been better than peers – 18 percent YoY growth in FY20 versus sub 10 percent for peers owing to low reliance on ULIPs – 28 percent of individual APE in FY20, JM Financial feels.

Overall, the protection share improved 50bps YoY to 17 percent of total APE in FY20 while individual APE was dominated by non-PAR savings at 41 percent. In line with improving share of non-PAR, the share of non-banca channels within individual business has improved by 9 percent YoY to 45 percent in FY20 with significant gains made by the broker channel.

Going forward, JM Financial expects HDFC Life to deliver operating RoEVs of 19 percent over FY21-22 on the back of stable margins of 26 percent. "We continue to like the franchise given a strong product portfolio, digital scale and superior return ratios."

Emkay resumed coverage on HDFC Life with a buy rating and a revised target price of Rs 568 at 3.5x March’22E EV (earlier Rs 580 at 3.5x Sep’21E EV). "HDFC Life has a balanced product mix, providing it cushion against any business cyclicality while at the same time, taking advantage of the grossly underpenetrated protection market."

Sharekhan also maintained its positive view on the stock and expects a 15-18 percent upside potential, though company reported lower-than-expected results for Q4FY20.

"Business growth and investment income may see some impact on the industry as well as HDFC Life due to the lockdown (already factored in the price); however, we believe the Indian insurance market has significant growth opportunities; and HDFC Life, with its strong brand image and riding on bancassurance benefit of HDFC Bank, is well placed to ride over medium-term challenges," it reasoned.

But Motilal Oswal maintained its neutral rating as ULIP demand is likely to remain muted amidst challenging macros due to the COVID-19 pandemic while trends in PAR/individual term business remain healthy.

To maintain its market leadership, HDFC Life would continue to focus on maintaining a balanced product mix across its savings and protection business with emphasis on product innovation/superior customer service, the brokerage said.

"VNB margins have moderated over the past few quarters and we estimate it to improve gradually to 27 percent by FY22 (25.9 percent in FY20) while operating return on embedded value (RoEV) should remain steady at 20 percent," it added.