HDFC Life: Upgrade to ‘hold’, lift TP to Rs 720 from Rs 610

The pension subsidiary clocked robust growth of 98% in AUM to over Rs 160billion.

Online retail and new categories drive spend recovery. Card spend was up 11% YoY but new card acquisitions were down 8% YoY. Both retail and corporate segments saw spend recovering to normalised levels. Online spend in non-travel categories (up 35-50% vs pre-COVID-19 level) are driving growth. The share of revolver loans continued to decline from 38% (pre-COVID-19) to 28%. Thus, the decline in interest yields more than offset the benefit of reducing funding costs. NIM, therefore, declined to 13.2% (vs 14.5% in 3Q and 16.6% in 4Q20). Furthermore, higher opex growth (up 5% y-o-y) kept operating profits muted (down 1% y-o-y).

Much like ICICI Pru Life, HDFC Life’s investment variance (10% RoEV boost) and ~1,000bps higher growth assumptions based on confidence spurred by its March monthly disclosures cascade into a 15%/19% uptick in our FY22E/23E EV. It lifts our target price to `720 (`610 earlier) with the multiple unchanged. This coupled with the muted stock performance drives the upgrade to ‘hold’.

Non-par savings, annuity and participating products continued to print strong growth in Q4FY21. Added momentum in par as well as non-par is also due to an improved performance of bancassurance in FY21. Focus on the huge opportunity in the retirement segment led to growth of 46% in Q4FY21 in the annuity business.

It now forms 5% of overall APE and 20% of total NBP. Management expects this segment to become as large as protection (13% of APE) over the medium term. The pension subsidiary clocked robust growth of 98% in AUM to over Rs 160billion.

In contrast to peers, the company had taken a cautious stance in Q3FY21 and slowed down growth of protection book to focus on building a quality book. This cautious approach would be fuelled in the wake of adverse mortality hit in EV to the tune of Rs 1.8billion.

Over the course of the year, the company has settled more than 290,000 death claims (covid plus non-covid) and paid in excess of INR30bn. While near-term challenges on the supply side, reluctance of customers to undergo medical check-ups and pricing headwinds remain, we are fairly confident of the company’s medium-term growth story driven by under-penetration of life insurance and the pandemic-induced ‘mindset reset’ on the idea of protection.