scorecardresearchHDFC Life is Emkay's top pick in insurance space; 4 reasons why it upgraded

HDFC Life is Emkay's top pick in insurance space; 4 reasons why it upgraded the stock

Updated: 26 Apr 2023, 12:30 PM IST

The brokerage has upgraded HDFC Life with a 12-month target price of 650, indicating an upside of nearly 27 percent. HDFC Life is Emkay's top pick in the insurance space.

Having health insurance is virtually a prerequisite to lead a secure life.

Having health insurance is virtually a prerequisite to lead a secure life.

RBI's decision allowed the merged HDFC-HDFC Bank entity to own over 50 percent stake in insurance entities (HDFC Life and HDFC Ergo). It comes as a double booster shot for insurance firm HDFC Life, believes domestic brokerage house Emkay.

The decision would mean:

1) HDFC Life becoming a direct subsidiary of HDFC Bank will have a two-fold effect on the firm – a) its share in the HDFC Bank channel (currently 50 percent) is likely to gradually improve; and b) the cost of distribution in the HDFC Bank channel is likely to improve and, hence, aid margins.

2) The overhang of a possible 19 percent stake sale by HDFC-HDFC Bank (current stake in HDFC Life: 48.65 percent), if the RBI had directed to keep the stake below 30 percent, goes away; rather, it is now certain that HDFC-HDFC Bank will acquire (fresh or secondary) over 1.35 percent stake before the merger-completion, the brokerage explained.

The brokerage has upgraded HDFC Life on the double booster from the RBI decision. It has a 12-month target price of 650 for the stock, indicating an upside of nearly 27 percent. HDFC Life is Emkay's top pick in the insurance space.

"Impact of RBI’s decision on HDFC Life was broadly a consensus view; however, views were divided as far as RBI's decision (above 50 percent stake or below 30 percent stake in insurance entities) itself was concerned. The RBI decision comes at a time when the external (regulatory and taxation) environment for the Life Insurance industry is fast changing (and entails some adverse impact) and listed life-insurance peers have certain issues of their own. Against this backdrop and with the huge overhang now behind, HDFC Life is best positioned to grow profitably and increase its market share," said the brokerage.

Stock price trend

HDFC Life has been almost flat, down 2 percent in the last 1 year but has shed around 6 percent in 2023 YTD even though it was positive in 3 of the 4 months of the year.

The stock has gained nearly 7 percent in April so far after a 2 percent rise in March. However, it lost 15.5 percent in February. The stock was up 2 percent in January.

Why the upgrade?

HDFC Life as a direct subsidiary of HDFC Bank will catalyse the growth: As per the brokerage, HDFC Bank has been the biggest distributor for HDFC Life, however, starting FY19 (once HDFC Bank partnered with Tata AIA and Birla Sun Life), the share of HDFC Life in the HDFC Bank channel’s new business has come down, from 100 percent in FY18 to 50 percent by H1FY23. Post merger, once HDFC Life turns into an HDFC Bank subsidiary, Emkay expects a gradual and sustained share in the HDFC Bank channel which should catalyse HDFC Life’s business growth over the medium term. With HDFC Life’s largest distributor – HDFC Bank – turning into its promoter, the brokerage sees distribution costs to support new business growth and, hence, support the margin trajectory.

HDFC Bank’s branch expansion to complement HDFC Life’s growth: HDFC Bank has added 2,200 branches in the last 2 years and targets adding 1,200-1,500 branches over the next two years, noted the brokerage. These new HDFC Bank branches, mostly in semi-urban and rural areas, would set a huge platform for HDFC Life's future growth by providing the much-needed expansion in such areas, to sell more granular ticket-size policies post the taxation changes on high-ticket policies, stated Emkay. At 83 million customers and 7.8K branches, with its ambitious growth plans, HDFC Bank, as the promoter and distributor, offers a long growth runway to HDFC Life, which currently has 6 million in-force individual policies, said the brokerage.

The overhang of a possible stake sale turns into an acquisition: In the past, RBI has asked banks to keep a below-30 percent ownership in insurance companies. Currently, HDFC-HDFC Bank owns a 48.65 percent stake in HDFC Life. With the RBI allowing the merged entity to go above 50 percent before the merger date, the feared situation of 19 percent stake-sale requirement turns into hope of at least 1.35 percent stake acquisition by HDFC-HDFC Bank before the merger date, noted the brokerage. The HDFC-HDFC Bank duo can choose to increase their stake, either by purchasing from the secondary market or by fresh equity infusion into HDFC Life. Given the comfortable solvency levels (210 percent for 9MFY23), Emkay sees a higher likelihood of a secondary market transaction.

HDFC Life stands out among peers: Given the recent taxation-related changes and a plethora of regulatory changes, the sector outlook is uncertain, however, among peers, HDFC Life stands out, said the brokerage. This is because HDFC Life's own specific overhang is behind and its to-be promoter and largest distributor’s aggressive branch and geographical expansion plans prepare it well in its pursuit of long-term growth opportunities, by selling more granular ticket policies, explained Emkay.


To reflect the expected changes from HDFC Life turning into an HDFC Bank subsidiary as well as to reflect the supernormal March growth, Emkay has adjusted its FY23-25 estimates. This has resulted in the FY23-25E APE (annual premium equivalent), VNB (value of new business) and EVOP (embedded value operating profit) increasing by 10 percent, 11-12 percent and 9 percent, respectively, forecasted the brokerage.

The relatively clearer outlook for HDFC Life – at a time when listed peers are facing certain specific challenges of their own – implies that HDFC Life’s premium valuation versus peers would sustain, it said.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.


HDFC Ltd & HDFC Bank Merger: The Fineprint
First Published: 26 Apr 2023, 12:30 PM IST