HDFC Life stock gains 3.9%; improvement in first quarter priced in

The HDFC Standard Life Insurance stock on Friday gained 3.9 per cent to close at Rs 489.7 on the BSE after the company posted a strong but in-line set of numbers for the June 2018 quarter (Q1). While the business performance was good, analysts believe the same is already priced in, which might limit further upside in the stock.

HDFC Life’s value of new business (VNB) margin expanded 370 basis points (bps) over a year to 24.2 per cent in Q1. VNB indicates the present value of total premiums receivable from new insurance policies issued. Better product mix with increase in share of protection products (terms policies) and improved persistency ratio (reflect customer stickiness) are some of the factors that boosted the VNB margin during the quarter.

Share of protection products, having highest profitability, went up to eight per cent in Q1, from five per cent a year ago. Even in terms of annual premium equivalent (APE), the share of protection products increased 710 bps to 18.2 per cent. However, its share was down in terms of new business premium (NBP). The management said, besides higher base of protection products in NBP, the company recorded growth in NBP across all products, which lowered share of protection. So, it is not a reason to worry.

Second, persistency ratio improved strongly across all the brackets, except in the 61st month bracket. Persistency is the share of business renewed (by customers) out of the already underwritten business. Persistency ratio, for instance, for the 13th month cohort, improved to 87 per cent in Q1, from 85 per cent a year ago.

Moreover, the company clocked a sharp 43 per cent year-on-year growth in VNB to Rs 2.5 billion and its APE, a measure of life insurance company’s revenue based on new business won by it, grew 26 per cent over a year to Rs 10.3 billion, in Q1. With the management expecting consistent growth in protection products, improvement in persistency and upward trend in VNB (as fixed costs get absorbed over higher revenues), the company’s margin is likely to improve.

While the Q1 performance was good and the future prospects remain healthy, near-term gains for the stock appear limited. “The stock has already priced in good performance and margin expansion of the company. Currently, it trades at highest valuation in the life insurance industry (4.2 times its FY20 estimated embedded value), which can limit further upside in the stock,” says Avinash Singh, research analyst at SBICAP Securities. Long-term investors may consider it on corrections, say analysts.


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