On the back of healthy earnings in the first quarter of the financial year 2022-23 (Q1FY23), several brokerages are bullish on the private insurer HDFC Life Insurance Company. They see up to 38 per cent growth in its share price from the current market price.
HDFC Life reported a 23 per cent year-on-year growth in net premium, led by 27/19 per cent growth in new business/renewal premium, and 25 per cent growth in Value of New Business (VNB), driven by 22 per cent annual premium Equivalent (APE) growth during the June-end quarter.
Overall protection segment growth was strong and led by credit life as retail term protection growth is estimated to fall sharply. Besides, the management cited inflation-led consumer sentiment impact and tighter underwriting criteria as the key headwinds affecting retail protection sales.
The share price of HDFC Life gained nearly 1 per cent to Rs 540.5 per share on the BSE intraday as against a 1.3 per cent rise in the S&P BSE Sensex at around 01:25 PM.
Kotak Institutional Equities
We expect HDFC Life to deliver 14 per cent APE growth over the next nine months as business activity picks up. We expect the company to deliver 17 per cent VNB CAGR in FY2023-25E after 19 per cent in FY23E, augmented by the merger with Exide Life. We expect HDFC Life to deliver faster-than-industry growth over the medium term, given its track record of ‘industry firsts’.
Near-term forecasts are muted and pose upside risks. The company will likely need to raise capital to support its solvency (178% in June 2022), diminished by large payouts for the Exide Life acquisition. We retain a Buy rating with a revised target price to Rs 710 from Rs 700 apiece (33% upside).
Overall, the management remains focused on maintaining a balanced product mix. VNB margin expanded by 60 basis points year-on-year (YoY) to 26.8 per cent, led by an improved product mix. Exide Life has reported 34% YoY growth in individual WRP.
Overall, the topline performance was decent, but headwinds on retail protection growth are a cause for concern. We maintain a Buy rating on the stock with a target price of Rs 737 apiece (38% upside).
In the near term, Non-PAR and Annuity are likely to clock healthy growth, while Protection will witness a gradual recovery over FY23. Credit Life will lead growth in Protection as momentum in Retail Term Insurance remains soft. Demand for ULIP remains muted due to a volatile capital market.
Persistency trends remain steady and continue to aid robust renewal trends. We estimate a VNB margin of ~29%, enabling a 26% VNB CAGR over FY22-24, and expect an operating RoEV of ~20% in FY24. We maintain a Neutral rating with a target price of Rs 600/ per share (12% upside).