Insurance sector at an inflection point: HDFC Life

Update on the Indian Equity Market:

The equity index, Nifty recovered from day’s low to end higher at 9,973 (+0.7%). Among the sectoral indices, Auto (+2.9%), Realty (+1.2%), and PSU Bank (+0.8%) led the gainers while IT (-1.5%), and Media (-0.9%) were the only losers. M&M (+7.6%), INFRATEL (+6.5%), and SHREECEM (+5.8%) were the highest gainers while ZEEL (-4.5%), ONGC (-3.4%), and TECHM (-3.1%) led the laggards.

Excerpts of an interview with Ms. Vibha Padalkar, Managing Director (MD) and Chief Executive Officer (CEO), HDFC Life published in Economic Times on 9^th June 2020:

• People are adjusting to the new normal and becoming more resilient and the need for life insurance is becoming more and more apparent, from just one metric.
• HDFC Life has written more than one lakh policies in the first two months of FY21. Having settled over 500 death claim settlements, over 10,000 maturity claims, and close to a lakh annuity payout, the roadmap to customer servicing in the new normal is being laid.
• The life insurance sector piggybacks 2-2.5x GDP. If some recovery is seen toward the end of H1FY21, then the insurance sector could show low single-digit growth. In her opinion, the recovery could more likely be W shaped.
• There is certainly risk-averse sentiment in the market.
• The online distribution channel has shown growth in YTD May against overall decline for the company and the sector. The Bancassurance channel in May has done significantly better versus April. As banks open their branches, and they adjust to the new norm of digital-based selling, this channel will also see growth.
• As protection continues to do well, double-digit growth is being observed in that part of the business. The turbulence in the markets has led to reduced demand for unit-linked products for now.
• Risk-based products are doing very well and the other end of the spectrum like the non-participating products are not doing so well.
• It is extremely difficult to predict the growth estimates for FY21 and they are taking it on a rolling quarter basis. They have already witnessed a 100 bps increase in the market share and are number one in terms of new business growth in the private sector. They will continue to retain and grow the market share, but it will be a function of overall market pickup as well.
• The medium-term outlook for the sector is positive since insurance will become more relevant. This is the inflection point for the insurance sector and will start seeing an uptick more than pre-Covid.

Consensus Estimate: (Source: market screener website)

• The closing price of HDFC Life was ₹ 503/- as of 12-June-2020. It traded at 76x/ 57x the consensus EPS estimate of ₹ 6.6/ 8.8 for FY21E/FY22E respectively.
• The consensus average target price of ₹ 544/- implies a PE multiple of 62x of FY22E EPS of ₹ 8.8/-.
• In the case of life insurance companies, the embedded value per share is the correct multiple for valuing the company. The consensus estimate of this metric is not available on any of the websites.

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