HDFC Life is a BUY for target price of Rs 850 (33% upside) due to robust demand in tier-2/3 markets, rising market share in the HDFC Bank channel and new distribution partnerships: Bob Caps

Muted quarter; clear growth roadmap a positive

 9MFY24 growth low but management’s clear roadmap for growth raises confidence on medium-term prospects

 ULIP share continues to increase in the APE mix; non-par business remained stable

 TP revised to Rs 850 (vs. Rs 822) as we raise FY24-FY26 EV estimates by ~3% each; maintain BUY

APE growth sluggish…: HDFC Life’s individual and overall APE grew at a muted 6%/5% YoY as at end-9MFY24. Further, individual APE market share slipped from 16% in FY23 to 14% at end-Q3FY24, though the company retained its #2 rank among private peers. On the positive side, management indicated that it has rolled out new products, seen strong growth in tier-2/3 cities (but expect pick up from Q4: We expect higher growth from Q4FY24 onwards due to management’s targeted growth strategy of (i) expanding in tier-2/3 markets, (ii) adding new banking partnerships where APE growth is historically 30-40% in the first 15 months of onboarding, (iii) hiring new agents, (iv) driving growth in sub Rs 0.5mn policies (+17% YoY in 9M), and (v) maintaining a balanced product mix which should hold the company in good stead when market exuberance subsides.

ULIP business gains traction; non-par stable: Owing to the buoyant equity markets, the share of ULIPs in APE has risen from 16% in FY23 to 24% in H1FY24 and 27% in 9MFY24. Non-par APE was stable at 24% in 9MFY24 but showed a decline compared to FY23. The share of protection plans fell from 17% in H1FY24 to 15% in 9M but has increased from 13% in FY23.

Stable VNB margin: HDFC Life generated VNB of Rs 22.7bn (+5% YoY) with a stable margin of 26.5% at end-9M and retained guidance of staying margin-neutral by FY24-end. We continue to factor in a VNB margin of 26.5% for FY24 but expect FY25 to have a margin of 27% (vs. 26.5% earlier), with a similar level in FY26. We now pencil in a 12% VNB CAGR over FY23-FY26 to Rs 52bn and a 13% APE CAGR to Rs 188bn.

Maintain BUY: HDFC Life is trading at 2.1x FY26E P/EV. We continue to value the stock at 2.8x FY26E P/EV– a 30% discount to the long-term mean – while raising our FY24-FY26 embedded value (EV) estimates by ~3% each to bake in the strong economic variance seen this quarter. This yields a higher TP of Rs 850 (vs. Rs 822). We maintain BUY given robust demand in tier-2/3 markets, rising market share in the HDFC Bank channel and new distribution partnerships.

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