Good point. Do you know what is the discount rate considered now vs 2021?
No idea but directionally I believe HDFC life should do better in 2024 for two reasons. One is of course easing of valuations and second is potential catch up rally that could play out in large caps with underperforming large cap quality stocks getting flows.
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Quarter after quarter this company fails to impress. Valuations still high in spite of a long time correction. Holding on to it since 2019 with negligible gains.
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I can see a lot of positives here to feel good about the stock 
First, despite regulatory headwinds their performance has been decent. Second, they are outperforming many of their peers on key metrics such as VNB, APE etc. Third, big chunk of insurance market share is with a PSU (LIC) and I would bet on HDFC (or any well run private insurance player) to eat into that. Last, insurance penetration is still quite low in India (I believe among the lowest in G20 countries) and is projected to grow at steady rate.
So essentially for HDFC Life, my bet is not on just an increasingly larger share of current pie but a growing pie itself. I expect 1-2 quarters of further wait before we start seeing encouraging action in stock prices.
Disc- Invested and continue to add on dips
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When I bought in 2019, the thesis was the same.
Low penetration of Life Insurance, a quality group and decent growth. But not much has played out since. Regulatory interventions have pulled it back often and VNB growth has been below expectations. Zero points for performance, 100 for my patience. 
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The biggest overhang for the insurance company stocks is the looming tax dispute battle for agent commissions. Quote: âHDFC Life on June 23 said it had received a show-cause notice from the Directorate General of GST Intelligence (DGGI) demanding Rs. 942 crore tax for the July 2017 to FY22 periodâ.
The Tax Department is alleging that Insurance companies are paying agent commissions far in excess of what is legally permissible. Please note that the issue is industry-wide and not limited to HDFC Life alone. If the Tax Authorities are right, then their claims on Insurance Cos. are aggregating 1000âs of crores.
This in turn can lead to prolonged tax litigation. It is tough to predict the outcome and timeline of such disputes. Plus, any clamp down on agent commissions could adversely affect the distribution network of insurance policies, which will further impact the future business growth.
Source:
Disc: Invested since more than 1 year
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When i restarted investing in the markets, this was my first buy, in 2019. If I had put this money in a savings account, it would have generated more. I really donât know why insurance biz is not picking up in spite of low penetration and a black swan event like COVID. I have a theory but it is more philosophy than economics
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This looks bad from taxation regulatory perspective.
I think, with advanced IT systems in place, this could have been detected in 2018-19 itself, so that by this time, litigation could have been resolved.
It seems that, the IT (Information Technology) systems are not used and manually lot of calculations are done hence it is taking so much time to find mistakes. Does not bode well for nation with largest IT workforceâŚ
Q4 FY24 Update:
No. of shares = 215 cr (As of 31-12-2023 as per published data)
Embedded value (12MFY24) = 47,468 Cr
VNB (12MFY24) = 3501 Cr
IEV + VNB (12MFY24)/share = 47,440/215 = 237.06
Valuation(27/Apr/24) = 587 / 237.06 = 2.47x
This looks low as compared to historic valuations, if my calculations are correct.
HDFC LIFE has delivered a profit after tax of Rs. 1,569 crore, implying a YoY increase of
15%, fuelled by 18% increase in profit emergence from back book. This also looks reasonable inspite of headwinds during FY24.
Management is targetting more business from HDFC Bank going forward, and also more growth from Tier 2/3 cities. Whether these aspirations can be translated into reality, need to be looked at after few quarters.
P/B is lower as compared to LIC and SBI LIfe, but Market Cap/Sales is higher. PAT growth over 5 years is less than SBI LIFE but better than ICICI Pru Life.
It is not undervalued based on these parameters, but other parameters relevant to Insurance business mentioned above could be more useful to decide valuations.
Invested and Long term story looks intact, but overhang on stock price may continue due to low profitability and income tax related matters. Keeping expectations low as Insurance business is highly regulated business. This investment is only for 5+ years ore more, not from 2-3 years perspective as profitability over short term can not be predicted easily.
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They are more and more depending on HDFC bank for their business which reflects poorly on their other distribution channels. I donât know why they are depending more on HDFC bank. Why not develop other channels.
Also does anyone know about the dependence of SBI Life and ICICI Life on their banks.
And in their concall they have said that they will compromise on their margins to get growth which clearly shows they are struggling.
Disc: HDFC life is one of the largest position in my portfolio
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Yes, I also felt that, if they are planning to increase business from HDFC Bank that means other channels are not firing.
Good that you have captured the point that, they are willing to compromise on margins which I have missed while going through call notes. This is a concern as profitability will be poor going forward.
Long term story is intact, but it looks like, we are loosing on short term gains by investing in this stock. It will be interesting to see if SBI LIFE is doing better in terms of year on year EPS growth. Though EPS and P/E is not the correct measure to value Life Insurance Business, but still it may be worthwhile to do this comparison.
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Last week I got a call from Yes Bank relationship manager trying to pitch some savings / investment scheme of HDFC Life
Too much of regulatory intervention in the life insurance sector is impacting price movement in insurance companies. HDFC LIFE was the biggest investment in my portfolio sometime back. Now cut holdings by more than half.
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The Insurance Bill (Amendment) - 2023 - due for implementation and likely to be approved in the upcoming sessions- could significantly impact the movement of the stock.
Upsides:
The bill suggests introducing composite licenses, enabling companies to offer both life and non-life insurance. This could benefit LIC, which already offers both types of insurance, but HDFC Life might need to adapt its strategy if it wants to compete in the non-life sector.
The concall of May 2023 includes the guidance as follows:
- Over time, as synergies with HDFC Bank come through and optionalities in the Insurance Bill and GIFT city are explored, margin uptake is expected.
Downsides:
Increased Competition: Existing life insurers may face pressure on profit margins if forced to lower premiums.
Adapting to Composite Licenses: While not mandatory, if life insurers donât obtain a composite license, they might lose out on potential business opportunities in the non-life sector. However, obtaining a composite license might require them to invest in new expertise, potentially increasing costs.
Higher Capital Requirements: Increased solvency margins could limit life insurersâ ability to invest in new life insurance products or expand their reach.
Overall, the impact on life insurance companies is mixed. While increased competition may lead to lower premiums and product innovation, it could also pressure profits. The potential for composite licenses creates both opportunities and challenges.
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what about presence of hdfc ergo already in health part? Is that good/bad or neutral for HDFC Life if it ventures into health as per composite licence.
Will then health products offered by both be similar or very different? How will the group adjust to this new situation as a whole?
I think the cross-selling of products can happen and itâs likely that the management is also aware of upcoming changes and would prepare accordingly. Still, nothing can be said until the bill gets approved and if there will be any final changes. Currently, you can notice that most of the life insurance stocks are in the uptrend and the chart patterns show a similar trend across the industries. There are also some which have given a break out last week.
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I would like to know your perspective on investing in Life Insurance business.
Since their profitability may not improve in the short term or medium term, what should be the expectations of an investor from 3-4 years perspective.
I can see that, EPS and PAT is not growing like other businesses, then Is it useful to invest in such stocks for Retail Investors OR Am I missing any thing?
SBI LIFE and ICICI PRU has given better returns than FD, but HDFC LIFE seems to be struggling.
My perspective was life insurance is a extremely under penetrated business in India and insurance companies have a long runway for growth.
I thought HDFC with is brand image, wits its reach all over India, its management, its ability to attract to attract talent will grow.
But unfortunately the company is not performing well. They are more and more relaying on HDFC bank to get business. Its speaks poorly about their other channels and the management to get business .
In the last concall they have also indicated that they are willing to reduce margins to grow which is a bad sign.
For 3 to 4 year perspective it will test the investor patience to the limit. . I have not yet read the latest concall and will post my views then. I will be reading not only HDFC concall but others concall also.
Thanks
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None of the negatives you have highlighted are actually nengatives.
1- Growing at the cost of margins- Nothing wrong with that. Topline is the most important thing for a business. When a business starts focussing on the margins at the cost of topline, itâs doomed. Growth in topline means market share gain and operating leverage.
2- Relying on HDFC bank- Whatâs wrong with that? The cross-sell or upsell opportunities are tremendous within HDFC family.
Finally what makes you think they are not growing? Stock prices may not always be a reflection of health of business for several reasons such as valuations or investorsâ preference for certain sectors. HDFC Life has traded at very high valuations so far which capped stock prices. But with valuations moderating, stock should do reasonable well.
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After going through your reply, I have understood that, HDFC LIFE was trading at premium valuations before 2022 i.e. P/B > 10 most of the time. This has attributed to poor returns if someone has purchased it 2-3 years back.
Though I purchased it during downside in 2022-23, still my returns are poor.
May be, going forward, with relatively lower valuations in terms of Embedded Value Vs Price, it may generate moderate returns.
No one knows until it happens.
Disc: Invested from lower levels of 2022-23.