Analyst Call Tracker: What is driving the sudden pessimism towards HDFC Life, will it last?

The 2023 Union budget proposal by Finance Minister Niramala Sitharaman limiting tax exemption from proceeds of high-value insurance policies has caused tremendous pressure on the Insurance sector recently.

Also Read: Analysts’ Call Tracker - Jan 2023

HDFC Life insurance in particular is seen slightly more affected and has seen the highest downgrades in the last month with its buy ratings reducing to ‘25’ from ‘30’ a month ago.

“HDFC Life will be the most impacted, given a higher share of single-premium product (Sanchay Fixed Maturity Plan), which constitutes around 20-25 percent of NPAR (non-participating insurance plan) APE (annualised premium equivalent),” said analysts at Phillip Capital.

The company post the budget announcement assessed that the business at risk could be approximately 10-12 per cent of the total APE.

Brokerage firm CLSA recently downgraded HDFC Life from Buy to Sell reducing its target price to Rs 460 from Rs 720 earlier.

According to JM Financial, “Within our coverage universe, HDFC Life is expected to be impacted the most with guaranteed non-par savings at 15 per cent.” The impact of top-line by 10-12 percent mentioned by the company translates to a bottom line impact of 5 per cent (provided other things remain the same), it said.

In a bid to mitigate the risks the company has said that they have an ongoing strategy of diversifying the product portfolio as well as have plans to accelerate deeper penetration into tier-II and III cities to have more customers having policies with different ticket sizes.

HDFC Life Insurance chief financial officer Niraj Shah added, “If we don’t do anything, the hit could be around 10-12% of the total APE (annual premium equivalent). But obviously, we intend to do a lot of things to prevent that. So, when we will do all of that, the impact will be in the mid-single digit.,”

However, HDFC Life managing director and CEO Vibha Padalkar said she believes in the long run, the impact of the new proposal will go down, or it will normalise.