Brokerages bullish on HDFC Life's strong Q1 results, see room for margin, VNB growth

So far this year, shares of HDFC Life declined over 1 percent, as against 11 percent rise in the benchmark Nifty 50 index

HDFC Life shares gained by a percent to Rs 644 per share on July 16 with the private insurer's Q1 financial results coming in line with the Street estimates. Brokerages remain largely bullish on HDFC Life stock, noting the firm's confidence in handling new surrender value norms, limiting their impact on margins, and gradually increasing the value of new business (VNB) in the long term.

So far this year, shares of HDFC Life declined over 1 percent, as against 11 percent rise in the benchmark Nifty 50 index. Earlier, the private insurer had hit 52-week high of Rs 710 per share on December 12, 2023.

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HDFC Life's VNB growth intact, margins to be rangebound

Jefferies shared a 'buy' rating for HDFC Life and assigned a target price of Rs 750 per share, indicating an upside of 17 percent from current levels. Analysts believe that a combination of improved persistency ratios, lower surrender profits, and interventions on commissions can help limit impact of new norms on VNB margins going ahead.

Meanwhile, Morgan Stanley analysts view the strong Q1 results as a positive indicator for FY25. They gave an 'overweight' rating with a target price of Rs 790 per share.

"We believe the regulatory overhang is largely behind. Given the recent stock underperformance, valuations have turned attractive. The near-term risk for the stock is the Union Budget. Once the 2024 budget is clear, we expect a rally to ensue," Morgan Stanley added.

HDFC Life's profit jumped 15 percent year-on-year in Q1FY25, with new business premiums rising 9 percent YoY. The company's VNB grew 18 percent YoY to Rs 718 crore, driven by a 31 percent increase in annual premium equivalent (APE) and a 22 percent rise in the number of policies.

ALSO READ: New surrender value norms will not impact margins significantly, says HDFC Life

However, the company's new business margins contracted by 120 basis points (bps) year-on-year to 25 percent in Q1FY25, compared to 26.2 percent in Q1FY24, due to higher expenses and inferior product mix.

Meanwhile, analysts at Goldman Sachs also shared a 'buy' call for HDFC and assigned Rs 765 as target price. "The company reported an in-line Q1FY25 APE or VNB due to strong performance in non-par savings. The buoyant market conditions drove unit-linked insurance plans to double YoY, whereas retail protection grew by a solid 29 percent YoY in the June-ended quarter," they noted.

No drastic impact from new surrender value norms, says HDFC Life

Regarding the revised surrender value norms, HDFC Life expects some impact in the first year of policy surrender, but none after two years and beyond.

"With the change in regulation increasing surrender value, we don't anticipate any significant drag on margins when policies are surrendered after two years. The only impact we see is in the first year, where our experience is quite good," the management stated.

The new surrender value rules, introduced on June 12, ensure better exit payouts for life insurance policyholders who are unwilling or unable to continue paying for their insurance. Surrender value is the amount a policyholder receives when they decide to terminate their policy before maturity.

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