HDFC Life sees flat margins in Q1 FY24; mixed outlook for stock

New tax rules prompts large-scale buying of high-value policies in March, causing drop in sales in the April-June quarter

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HDFC Life Insurance’s management has guided for flat margins in Q1 FY24 as much of the purchases of high-value insurance policies came through in the January-March 2023 quarter following the change in tax rules from the new fiscal.

In Budget 2023, Finance Minister Nirmala Sitharaman scrapped the tax exemption on income from traditional insurance policies with a premium of over Rs 5 lakh, effective April 1. This led to a rush for high-value policies in the March quarter, and took away sales that would have otherwise happened in the June quarter. Since high-value policies have better margins, the drop in sales impacted margins for the June quarter.

“As guided earlier, margin neutrality (after the Exide Life merger) was achieved in FY23. Margins were hit in Q1 FY24 owing to the front-ending of the business in March,” the management in a post-earnings call.

For Q1 FY24, HDFC Life’s margin in the Value of New Business (VNB) was 26.2 percent versus ~29 percent in Q4 FY23. VNB is the present value of future profits from new policies sold, minus expenses on that, and a key metric used to measure the profitability of new businesses.

HDFC Life’s margins were also weighed down by an 18 percent growth in Unit Linked Investment Products—a combination of insurance plus investment—as this product no longer offers the juicy margins it once used to.

At 10:30 am, HDFC Life was quoting at Rs 657.90 on the NSE, higher by 1.6 percent from the previous close.

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For the June quarter, HDFC Life’s VNB grew 18 percent YoY to Rs 610 crore, annualised premium equivalent (APE) grew 12.7 percent to Rs 2,328 crore and the Embedded Value surged 28.9 percent to Rs 41,843 crore.

APE is an insurance industry metric that standardises sales volume by considering premium payments at different frequencies (monthly, quarterly, annually). It enables better sales performance comparison over the period of a year. Embedded Value (EV) is a financial metric used in the insurance industry to evaluate the long-term profitability and value of an insurance company’s policies in-force, which includes existing policies and future expected profits from those policies. It is an indicator of the company’s overall financial strength and future growth prospects, and is the equivalent of price earning multiple for non-financial stocks.

According to domestic broking firm Motilal Oswal Financial Services, the company’s results were mixed, with a 6 percent shortfall in VNB and a 160 basis points (bps) miss on VNB margins compared to their expectations.

The banca channel’s share in distribution improved to 61 percent based on individual APE, while the agency channel constituted a 20 percent share. However, the direct channel faced stiff competition, leading to a decline in its share to 12 percent in Q1 FY24 from 22 percent in Q1 FY23.

“HDFC Bank Ltd. now holds 50.4 percent of HDFC Life. Our focus is on strengthening our partnership with HDFC Bank, enhancing collaboration, and maximising customer engagement within our group,” says Vibha Padalkar, Managing Director and Chief Executive Officer (MD & CEO), HDFC Life, in a statement.

Following this, JPMorgan has given an “Overweight” rating for the stock and has raised the target price to Rs 780 from the previous Rs 610. JPMorgan predicts that the margin for FY24 will likely remain flat, mainly supported by the rising mix of retail protection products. The overall performance of HDFC Life in Q1 was solid, with stronger alignment with HDFC Bank, it notes.

Morgan Stanley, too, has an “Overweight” rating on the stock with target at Rs 800.

Meanwhile, CLSA has taken a more cautious stance, assigning an “Underperform” rating to HDFC Life and setting the target price at Rs 680 per share. Despite acknowledging healthy growth in the APE across various products and channels, CLSA remains concerned about the VNB margin.

“The recent strong surge in HDFC Life’s stock price might limit the potential for further upside in the near future,” it said. HDFC Life has gained over 40 percent from March lows.

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