HDFC -- HDFC Standard Life – Steady growth:: Macquarie Research,

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HDFC
HDFC Standard Life – Steady growth
Event
 HDFC Life Insurance is a joint venture between HDFC Ltd of India and
Standard Life of the UK. HDFC Ltd owns 72% of the total capital and
Standard Life holds 26%. The company is one of the premier private life
insurance companies in India with a market share of 8.7%.

Impact
 Steady growth. New business premiums have grown at a CAGR of 50% over
the past five years. While this growth is impressive, it is still below the rates
achieved by some of its peers like SBI Life and Reliance Life. The company
has 568 branches and nearly 200,000 agents covering almost 700 cities.
 Distribution and business mix. Half of the company’s business comes from
banc assurance while 31% comes from agents. The remaining 19% is
contributed through other sources. HDFC Life has 82% of its business coming
from ULIP policies. This is in line with the industry average.
 New regulations result in significant headwinds to industry profitability.
We believe that industry profitability is likely to be structurally lower now after
the revised regulations. New business margins are likely to be down
significantly and growth prospects are poor in the near term. New business
strain is likely to increase in the near term thereby resulting in further capital
infusion. Product mix would be difficult to alter materially as the market
demand is for ULIPs. However the industry participants are sanguine over the
longer term, considering the demographics and macroeconomic potential of
India.
 Sales have slowed, IPO still some time away. The life insurance business
has slowed down post Sep’10, though there were some signs of a pick up in
Dec’10. New business margins had increased from 16% in Mar’10 to 24% in
Sep’10. However post the recent changes, the company expect NBAP margins
to stabilise around 16-18%. They are in discussions with their partner Standard
Life regarding a listing which at this point would be some time away.
Action and recommendation
 We value HDFC Standard Life at 14x FY12E NBAP. This results in a Rs55
per share contribution to HDFC’s SOTP. We rate HDFC Ltd an Outperform.


HDFC Standard Life Aide Memoire
1. What is the trend for new business margins for the life insurance business? How have they been impacted post the new
IRDA guidelines? What do you think the sustainable new business margins are for you?
2. What is the growth you are targeting for FY11 in terms of a new business premium and also what is the medium-term
outlook for growth?
3. What is your take on long-term growth prospects for the industry? Do you think the long-term growth drivers of the industry
remain intact?
4. How is the product mix going to change for you in the new regime? For the industry? How are you retraining your agents?
5. When do you expect sales to normalise from the impact of current uncertainty in the marketplace?
6. What are the cost-cutting measures you have taken for improving margins?
7. Are you facing issues of agent dissatisfaction in view of lower commissions on ULIPs? Do you see lower commissions as a
hindrance for your company and/or the larger industry to attract talent?
8. How much more capital is required for the insurance business?
9. When do you expect to list the business? Is the foreign investment limit to be raised (from the current 26%) an important
requirement before listing the subsidiary?