Buy HDFC Life Insurance Company, target Rs 465: Prabhudas Lilladher

Prabhudas Lilladher has a buy recommendation on HDFC Life Insurance Company with a target price of Rs 465.

The current market price of HDFC Life Insurance Company is Rs 401.25 and the time period given by the brokerage is one year.

Investment rationale by the brokerage-
Slower growth mitigated by growth in high margin products: Overall APE growth of 13.2 per cent YoY in FY19 was slower than and 32 per cent YoY in FY18, although growth was much higher in both protection annuity and term. Mix of annuity and term has improved to 4 per cent & 17 per cent in FY19 from 2 per cent & 11 per cent in FY18 respectively and strongly led by direct and online channels. ULIP mix has overall see decline by 200bps in mix from 57 per cent in FY18 to 55 per cent in FY19. Higher growth in protection has led to margins continue to improve from 23.2 per cent in FY18 to 24.6 per cent in FY19 with strong tailwinds in margins in Q4FY19. We see company continuing to push both annuity & term protection taking up share further.

Operating metrics have been strong with inline EV with our estimates: Cost ratios have moderated both on commissions and opex, while persistency has seen improvement especially on the 61st month. HDFCLI continued to deliver 20 per cent RoEV with VNB growth of 20 per cent in FY19 and superior margins which has helped deliver similar growth in EV which has been largely in-line with estimates.

Banca channel contribution still continues to be weaker: Banca channel has been muted on individual growth partly on both slower ULIP sales and much faster non-Banca Annuity & term protection which has made Banca channel at disadvantage. Also, on group credit life partnerships still are in the works with certain PSBs getting into merger or are still in consolidating phase. We continue to watch sourcing mix of products.

Premium to peers but warranted: In our view strong product innovation, growth in high margin products, stable operating metrics and high quality franchise warrants a higher multiple at 3.4x but peers provide much higher upside as in FY19 peers have also seen better improvements in margins, gains to EV and strong growth in protection segments should help lower discount of 40-50 per cent from current levels.