HDFC Life: Maintain ‘buy’, roll forward target price to Rs 850 from Rs 820

HDFC Life has outperformed peers in 9MFY21 with 8% Y-o-Y growth in APE that will improve in FY22-23. Growth in savings segment can improve, but protection may see divergent trends — retail protection may moderate whereas credit protect should see surge from low base. Company is looking to grow agency force, but will also watch out for LIC’s move on defending its attrition to private peers. We see 18% VNB CAGR over FY21-23 with 18% FY22 ROEV. Maintain ‘buy’.

Plan for FY22; four key trends to watch. HDFC Life has delivered better growth than private players in 9MFY21 with 8% Y-o-Y growth in retail APE vs. a 6% decline for private players. Going forward, we see four key trends ULIPs should rebound from a low base in FY21; HDFC Life has a higher share of new premium in the non-Par segment and with reasonable hedging capacity in the market and a supportive yield curve, growth can stay well; pension and annuities will be key areas of focus; and protection side can see divergent trends — in the retail segment HDFC Life will be cautious given the preference for health check-ups and softer demand but the credit-protect segment can see a surge as retail lending and attachments are normalising now.

Expanding share of agency; will watch out for LIC’s stance. HDFC Life has been looking to expand its agency force and also increase their contribution to premiums from 12-13% in 9MFY21 to a more balanced level of 25% by going beyond top 25-30 cities. As some agents are hired laterally, it will be key to watch LIC’s initiatives to retain agents (especially as it gets listed and increases focus on growth /profitability). It will also be important to watch out for LIC’s strategy in Tier III or lower cities where it tends to have an edge with agents. As HDFC Life expands into smaller towns, it will need to compete closely with LIC.

Maintain ‘buy’ rating. We see 18% CAGR in VNB over FY21-23 with 18% FY22 op. ROEV. We roll forward our target price to Rs850 (from Rs820) based on 5x Mar-23E P/EV and maintain our ‘buy’ rating.