MUMBAI: Shares of HDFC Life Insurance Ltd have intelligently recovered since the national lockdown was lifted and are only 5% below their pre-covid highs. This compares to a 15-16% drop in shares of other private life insurers such as SBI Life Insurance Company Ltd and ICICI Prudential Life Insurance Ltd.
What is behind the investor heat for HDFC Life Insurance?
For starters, the private sector life insurer was on solid footing even before the pandemic hit at the end of March. The performance of the company for fiscal year 2020 was better than that of its peers. Profitability metrics such as new business growth value and new business margin value have consistently outperformed competitors. For example, HDFC Life’s new business margin value was 25.9% for FY20 versus 18.7% for SBI Life and 21.7% for ICICI Prudential Life.
The performance for the June quarter showed the impact of foreclosure. But HDFC Life has succeeded in preventing profitability metrics from eroding too much. Despite a 33% contraction in the new business premium, the insurer maintained its margins at 24.1%. The peers ICICI Prudential Life and SBI Life experienced steeper contractions in new business.
Data from the industry regulator shows that HDFC Life has done much better than its peers in recovering from the pandemic.
The rebound in the new business premium in July and August helped reduce the decline in HDFC Vie’s activity. On the basis of the annualized premium equivalent (APE), the contraction in HDFC Life’s activity was only 5% for the first five months of fiscal 21. For SBI Life, the contraction was by 19% and ICICI Prudential Life Insurance recorded a decrease of 40%.
While these seem to justify valuations, some analysts note that stocks may have gotten expensive.
Edelweiss Securities kept its reduction rating on the stock. “The 4.4 times the intrinsic value valuations for FY22 are due to a legacy of higher margin / growth compared to the competition, as well as brand advantages,” analysts wrote. ‘Edelweiss in a note.
Of great concern to analysts is the potential moderation in protection business, which has contributed significantly to HDFC Life’s margins. Kotak Institutional Equities noted that the increase in the ratio of sum insured to premium payment and the increase in average note size indicates that the growth of single term plans may be moderate compared to that of other traditional products. . Since protection plans are favorable to margins, this could weigh them down. Nonetheless, the sustained recovery in growth of HDFC Life is its best ally in maintaining investor interest.