Analyst Corner: Retain ‘add’ on HDFC Life with fair value of Rs 705

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HDFC Life reported 27% VNB growth in 3QFY21, translating to flat VNB for 9MFY21

Another strong quarter. HDFC Life reported 27%VNB (value of the new business) growth driven by the balance of strong APE growth and VNB margin expansion. Optimisation of its product mix (lower Ulips, higher par despite lower non-par) and strong bancassurance business aided support. A strong pipeline of new product launches will continue to support its superior growth and drive premium valuations; retain add with FV of Rs 705.

VNB growth was strong at 27% year on-year (YoY) in 3QFY21 led by 18% YoY growth in APE and 180 bps yoy expansion in VNB margin to 26.5% (up 110 bps QoQ ). VNB margin expanded despite a drop in the share of high-margin protection and non-par savings businesses to 37% of overall APE from 45% in 3QFY20; down 130 bps quarter-on-quarter(QoQ ). The expansion was led by strong growth (up to 1X yoy)in the long-tenure participating policy (30% ofAPE), 200 bps growth in the annuity segment (5% of APE) and 600 bps yoy fall in Ulips. Repricing of protection in selective cohorts and non-par policies likely supplemented margins. A strong NBA translated to 45 bps YoY expansion in operating RoEVto 17.7%. Rise in operating ROEVwas the interplay of 180 bps YoY increase inVNB margin to 26.5%, marginal increase in unwinding rate by 15 bps and (3) lower operating variance (down 71%YoY).

HDFC Life reported 27% VNB growth in 3QFY21, translating to flatVNB for 9MFY21; this is significantly better than our estimate of 2% YoY decline in FY2021E built-in at the beginning of the year. The company reported 183 bps VNB margin expansion in 3QFY21 by optimising its product mix along with gaining significant market share (140 yoy bps in individual API to 9.6% in 9MFY21). It continues to maintain its product leadership with consistent ‘firsts’ (launches) to its credit, reading industry trends ahead of time.



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