This Large Cap Insurance Sector Stock Gets 'Buy' Call For 42% Gains, Recommended By ICICI Securities

ICICI Securities is bullish on HDFC Life Insurance Company Ltd and recommends 'buy' for a target price of Rs 756 apiece. HDFC Life Insurance Company is a large cap insurance sector company, a part of the HDFC group. Its market capitalization is Rs 1,12,727 crore. Considering the estimated target price, if the investors buy the stocks of the company at the current market price, they could expect potential gains of 42%. The brokerage in its report stated that the company's weaker margin outlook is a near-term overhang; the underlying story remains strong.

Stock Outlook

The Current Market Price (CMP) of the HDFC Life Insurance stock is Rs 535.60 apiece, it was opened at Rs 530 apiece. Trading 1.23% above the previous close of Rs 529.10 apiece. The 52-week low is Rs 497.05 apiece and the 52-week high is Rs 775.65 apiece, respectively.

Stock's PE ratio is 81.35 while the PB ratio is 7.16. The TTM EPS is Rs 6.56. The ROE is 8.50%. 

Over the past 3 years, its share price has gained 8.75%. However, its share in the past 1 year has fallen almost 19.41%. in the last 1 week, it has declined 1.17% and 3.3% in the last 1 month, respectively. 

Stock Details
CMP	Rs 535.60
Target Price	Rs 756
Potential Upside	42.00%
Market Cap	Rs 1,12,727 Cr
1-Year Return	-3.30%
3-Years Return	8.75%

Product mix remains balanced; protection mix increased due to sharp growth in credit protect (up 96% YoY)

Basis total APE, protection APE grew 32% YoY - of which group protection increased 78% YoY while retail protection declined 28% YoY. Share of protection APE in overall APE rose from 16%/14% in Q1FY22/FY22 to 17% in Q1FY23. Group protection mix increased from 8.8%/8.6% to 13% in the same periods. Share of ULIP / par shrunk 240bps / 120bps over FY22 to 20% / 24%. Non-par mix remained stable at 28% while annuity rose from 5% in FY22 to 7% during the quarter. 13M/61M persistency improved from 90%/53% in Q1FY22 to 93%/58% in Q1FY23. 

Yet, VNB margin declined QoQ on lower VNB growth vs cost upfronting

While the full-year margin outlook may not change as backended revenues lift the annual margins, the outlook on retail protection (especially online) is weak. Narrative on the weakness has shifted notably from inability to perform medical testing to impact of high inflation on generic discretionary demand. Also, the company sounded more open to tactically increase group term business basis available pricing and results. This, together with credit protect and non-par business, can support margins. 

Banca mix declined but remained dominant

In terms of individual APE, banca mix fell from 60% in FY22 to 56% in Q1FY23. Direct / agency / brokers / others mix rose from 19%/14%/6% to 22% / 16% / 7% in the same periods. Other than HDFC Bank, HDFC Life has tie-ups with Axis Bank, RBL Bank, Yes Bank and Bandhan Bank. 

Q1FY23 Exide Life update

Individual APE for Exide Life rose 42% YoY to Rs1.4bn. Product mix (in terms of individual APE) stood at 60% / 27% / 6% / 7% for par / nonpar / protection / ULIP. VNB margin (pre-OR) was 40%. Q1FY23 channel mix was: 51% / 7% / 29% / 13% for agency / banca / broker / direct. Our target price includes a value of Rs24/share for Exide Life. 

Q1FY23 EV declined 1% vs FY22 due to negative economic variance of Rs7bn (due to higher interest rates) and Rs4bn (due to adverse equity performance).

Buy for a target price of Rs 756 apiece

According to the brokerage firm, "HDFC Life's Q1FY23 APE/VNB grew by 22%/25% YoY. Rising costs were partially responsible for sequential decline in the VNB margin despite 65bps YoY increase to 26.8%. The weak outlook in retail protection is a disappointment given its earlier guidance of high-single digit growth in retail term protection for FY23. Continued VNB CAGR of >20% will require better margin and APE growth. However, basis track record (VNB CAGR for past 5 years has been 29%), well balanced product (ULIP mix of 20%) and distribution mix, we remain positive on HDFC Life. Maintain BUY with the target price unchanged at Rs756 based on FY24E EV of Rs395bn, 30x (unchanged) FY24E new business of Rs38bn and add Rs24 per share of Exide Life based on 1.5x FY24E EV of Rs33.5bn. Possible participation of life insurers in the health indemnity business offers regulatory tailwinds."

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.