HDFC Life has been delivering well on growth with steady improvement in margins. While the gap in margins and ROEV delivery across top insurers seems to have converged now, and that has led to compression of premium valuations, we believe HDFC Life’s ability to deliver growth and stability in margins in light of plateauing VNB margins will likely restrict further compression. HDFC Life’s ability to switch products and channels is well appreciated, and with margins plateauing, we think the company will provide the necessary stability vs peers in growth/earnings metrics. Valuation premiums have reduced from 112% to 42% vs SBI/IPRU Life over the past 17 months, and hence we expect steady compounding ahead. Our reduced TP of Rs 680 implies 3.1x/24x FY24F EV/VNB – SBI Life (SBILIFE IN, Buy) remains our preferred pick in the insurance space.

Delivering well on growth: 1) Individual APE growth of 5%/15% y-o-y in Q4/FY22 (17% three-year CAGR); 2) APE growth supported by more balanced growth across most segments (barring PAR) with non-PAR growth supported by Sanchay FMP, which contributes 15% of non-PAR (mix stable at 33%); 3) overall protection APE grew 6%/24% y-o-y in Q4/FY22 with retail protection largely flat in FY22, while group protection (up 48% in FY22) was supported by credit life bouncing back on a low base (up 53% on NBP basis); and (4) agency channel grew 24% y-o-y in FY22.

Steady improvement in margins profile: VNB margins improved to 27.4% in FY22 vs 26.5% in 9MFY22, aiding 16%/22% VNB growth in Q4/FY22. The improvement was led by product mix (130bp y-o-y) including credit protect, annuity and non-PAR as well as operating leverage. This was partly netted off by an 80bp negative impact in operating assumptions (largely mortality led). Shorter tenure new non-PAR products will allow HDFC Life to further increase its non-PAR mix and support continued improvement in margins in addition to some bounce- back in protection, in our view.

We build in 17%/20% APE/VNB CAGRs over FY22-25F. HDFC Life delivered operating ROEV of 19% in FY22 (largely in line with historical trends) and adjusting for COVID impact, operating ROEVs were 16.6%. We expect operating ROEVs of ~20% over FY23-25F.