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HDFC Life is focused on sales quality and enjoys significant cross-selling opportunity through
HDFC and HDFC Bank. Though efficiency ratios look weak (as the company is in investment
mode), we believe it will be able to deliver return ratios in line with comparable peers (SBI Life
and ICICI Prudential).
HDFC Life: ‘Need-based sales’ focus to continue
With persistency and operating risks spiralling, following new product guidelines, most insurers
have adopted a conservative stance and have cut costs and adjusted product mix to contain
risks. However, HDFC Life has maintained its focus on ’need-based sales’, in order to maintain its
sales quality and build a strong retail franchise. HDFC Life saw single premium exposure jump by
9ppts (to 17%), vs the 19ppt increase (to 30%) of private insurers. Further, unlike peers, the
insurer maintained its product mix with ULIPs forming 86% of NBP (83% in FY10).
HDFC Life: Striking a balance between growth and profitability
After lowering operating expenses in FY10, management focused on network consolidation in
FY11 which helped contain operating expenses (flat yoy). We believe the benefits of measures in
FY11 will continue to flow through in FY12F. Management is not keen on cutting expenditure at
the cost of future growth and intends to gradually invest in expansion (subject to periodic market
reviews). Unlike ICICI Prudential and SBI Life, we believe HDFC Life will have to keep tabs on
expenses to contain opex growth below 5% over FY12-14F.
HDFC Life: Bancassurance focus to continue
In response to new guidelines, HDFC Life changed its distribution mix – its bancassurance
contribution to new business premium rose to about 66% in FY11 from 55% in FY10. Over the
next two to three years, considering the need to control costs, we expect bancassurance to
remain the dominant channel.
We increase our target price for HDFC on an increased valuation for HDFC Life
We increase our valuation of HDFC Life from Rs95bn earlier to Rs103bn (2.2x FY12F EV, 11.8x
book) (or from Rs47 per HDFC Ltd share to Rs51). As a result, our target price for HDFC Ltd
rises from Rs759 to Rs763. Being on a higher cost base than its peers, HDFC Life has a higher
operating cost to GWP ratio relative to the likes of ICICI Prudential, SBI Life and LIC. Thus,
margins will be sensitive to improving productivity and growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Life is focused on sales quality and enjoys significant cross-selling opportunity through
HDFC and HDFC Bank. Though efficiency ratios look weak (as the company is in investment
mode), we believe it will be able to deliver return ratios in line with comparable peers (SBI Life
and ICICI Prudential).
HDFC Life: ‘Need-based sales’ focus to continue
With persistency and operating risks spiralling, following new product guidelines, most insurers
have adopted a conservative stance and have cut costs and adjusted product mix to contain
risks. However, HDFC Life has maintained its focus on ’need-based sales’, in order to maintain its
sales quality and build a strong retail franchise. HDFC Life saw single premium exposure jump by
9ppts (to 17%), vs the 19ppt increase (to 30%) of private insurers. Further, unlike peers, the
insurer maintained its product mix with ULIPs forming 86% of NBP (83% in FY10).
HDFC Life: Striking a balance between growth and profitability
After lowering operating expenses in FY10, management focused on network consolidation in
FY11 which helped contain operating expenses (flat yoy). We believe the benefits of measures in
FY11 will continue to flow through in FY12F. Management is not keen on cutting expenditure at
the cost of future growth and intends to gradually invest in expansion (subject to periodic market
reviews). Unlike ICICI Prudential and SBI Life, we believe HDFC Life will have to keep tabs on
expenses to contain opex growth below 5% over FY12-14F.
HDFC Life: Bancassurance focus to continue
In response to new guidelines, HDFC Life changed its distribution mix – its bancassurance
contribution to new business premium rose to about 66% in FY11 from 55% in FY10. Over the
next two to three years, considering the need to control costs, we expect bancassurance to
remain the dominant channel.
We increase our target price for HDFC on an increased valuation for HDFC Life
We increase our valuation of HDFC Life from Rs95bn earlier to Rs103bn (2.2x FY12F EV, 11.8x
book) (or from Rs47 per HDFC Ltd share to Rs51). As a result, our target price for HDFC Ltd
rises from Rs759 to Rs763. Being on a higher cost base than its peers, HDFC Life has a higher
operating cost to GWP ratio relative to the likes of ICICI Prudential, SBI Life and LIC. Thus,
margins will be sensitive to improving productivity and growth.
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