Sharekhan continues to prefer HDFC Life Insurance for its strong business franchise, backed by favourable product/distribution mix and a higher bancassurance channel sourcing, which helps the company report the industry’s best (higher and sustainable) margins. Sharekhan expects the government to provide favourable policy steps for the insurance industry (including life as well as non-life segments) in the Union Budget because of COVID-19 crisis.

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Insurance is an important social security tool, which helps safeguard against risks, which are a threat to life and livelihood. Measures such as providing a separate limit over and above the 80C limit and providing tax benefits to pension schemes (a la NPS) etc. are some possibilities. As per the provisional figures for Q3 FY21, NBP (New Business Profit) figures indicate healthy 18.8% growth yoy for HDFC Life, which is a smart recovery from the pandemic-induced challenges and indicates an encouraging Q3 performance.

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For December 2020 as well, HDFC Life posted good performance, with NBP increasing by 27% for December 2020, but on 9M FY21 basis, NBP posted growth of 11% yoy (was 8.81% till ytd in November), indicating traction. Total APE (calculated) was also up by 7.4% for December 2020.

Sharekhan believes while traction in the protection and annuity segments is still strong, segments such as credit protect and ULIPs would be seeing lower traction (understandably due to lower customer appetite and slower bank credit growth). However, the business mix of HDFC Life is favourable, with only 23% individual APE from ULIPs in H1 FY21 (has scaled down from 57% in FY2018 and 28% in FY2020).
Sharekhan believes the current COVID-19 health crisis has helped increase customer awareness and appetite for protection, which is likely to be helpful for protection products, which would be positive for HDFC Life from a growth standpoint.

HDFC Life, being the largest private life player, is well placed to benefit from tailwinds of growth as well as supportive regulatory measures. Management has guided for high single digit growth in annualised premium equivalent (APE) and value of new business (VNB) as a realistic possibility in FY2021. We expect growth to pick up from FY2022E. Protection and annuity businesses are gaining traction, backed by strong structural demand. Among products, Sanchay Par is expected to now improve, as banking channels see improved pickup of business. With increased credit offtake in housing and other segments, we expect credit protect businesses to pick up in FY2022E.

Sharekhan sees life insurance as an attractive long-term bet with a long runway for growth, supported by India’s demographics and underpenetrated/ underinsured Indian market. Sharekhan believes players with a strong balance sheet and business metrics would be able to tide over the crisis. Going forward, we believe demand for protection policies and savings products would be likely growth drivers in FY2022E. Sharekhan has fine-tuned our estimates for FY2022E and FY2023E.

Key Risks:

A slowdown in business operations and higher slippages/bond downgrades due to economic weakness may impact earnings outlook.