Can HDFC Life secure Investors future with multifold returns? | HDFC life fundamental analysis

As per the latest study, 75% of India’s population is not covered with any form of life insurance. 

That’s almost 100 Crore people without life insurance. On top of that, an average Indian is insured of roughly 8% of what may be required to protect the family from financial shock. 

Can you believe that?

And when it comes to medical insurance, every year millions of people end up selling their properties and assets for medical treatment just because they don’t have medical insurance.

Life and medical insurance, which is the most critical part of every individual, is still highly underpenetrated in India.

That said, it brings immense opportunity for the insurance sector to grow for the next 20-30 years. And one such company that is leading the insurance sector among private players is HDFC life insurance.

So in this article, we will cover the fundamental analysis of HDFC life by analysis the company and management, competitive strength, future growth prospect, and the financial analysis to decide if HDFC life is fundamentally strong or not. Then we will analyze the valuations of the company to decide if it is worth investing in HDFC life at current levels. So let’s get started.

Company and its management

• Established in 2000, HDFC life is a joint venture between HDFC ltd, which is India’s leading housing finance institution and a Mauritius based global investment company name Standard Life Aberdeen. As of Sep 20, HDFC ltd. holds a controlling stake of 50.14% in the company.
• HDFC life chairman is Mr Deepak S Parekh.
• Mr Deepak S Parekh is also the non executive chairman of HDFC ltd and chairman of HDFC AMC and HDFC Ergo general insurance.
• In his journey of 40 years, Deepak Parekh has been the man behind the success story of HDFC and HDFC Bank (India’s largest private bank).
• He is known as the voice of corporate Indian and a go to person for policy makers and government.
• In 2006, Deepak Parekh was awarded Padma Bhushan by GOI for his contribution for the corporate India.

These plans include both term plans where the insurer gets a life cover at low premium without any maturity benefits as well as plans where the insurer can get the life cover as well as get the sum assured on maturity. 

For example, a person can choose a plan where he will get life coverage as well as a fixed income post-retirement. Or someone with a low-risk appetite can choose a plan where he/she gets life coverage as well as investment benefit in low-risk instruments.

Overall, on the company and its management, I would rate HDFC life 10/10.

1. Part of the HDFC Family: HDFC life is part of one of the most prestigious group of India i.e. HDFC group. Its parent HDFC holds around 50% share in HDFC life. HDFC life is strategically a very important arm of HDFC group. HDFC life get a huge benefit from the brand name of HDFC and direct access to the customers base of HDFC group.
2. Established market position: HDFC life is one the top private players in life insurance space in India and its market position has improved every year. Within private players, HDFC life has a market share of 17.7% in Fy20. Further, insurance penetration in India is still very low and that would help HDFC life in strengthening its market position.
3. Strong and diversified distribution channel: HDFC life has a very strong and diversified distribution channel with 270+ partners ranging from traditional banks to NBFCs to new age fintech and insurtech firms.
4. Outstanding customer support: Company focuses a lot on providing exceptional customer service. It starts with an easy customer onboarding process till the claim settlement.
5. Full fledged adoption of digital business: HDFC life has adopted technology big way. For example, it has launched a digital CCD ( customer consent document) which is a critical document for customer onboarding. So this digital CCD is fully automated. Likewise, 60% of its post sales verifications are done via video based authentication mobile app. Their app InstaPRL seamlessly onboard new agents for their agency channel.

If we look at the keys factors that would impact the future growth prospects of HDFC life:

India is one of the youngest countries in the world. But, in the next 20-30 years, the insurable population i.e. people in the age group of 20-64 is expected to increase up to 1 billion. They would need long term savings and protection plans.

Moreover, the population above the age of 60 years is expected to triple in the next 30 years. It would create a huge opportunity in the retirement space with long-term income and annuity products. 

Very few people are aware about the 2 subsidiaries of HDFC life which is “HDFC Pension Management Company” and HDFC International Life and Re Company. HDFC Pension Management Company is the largest privately owned pension fund management company in India with a market share of 31%. This pension fund management market in India has just started to grow and there is a huge opportunity in the future.

Low insurance penetration

Indian life insurance space is highly underpenetrated. With the increasing awareness about the importance of life insurance, there is a huge scope of growth for life insurance companies.

Digitalization

Technology would play a crucial role in the future growth of the insurance companies. For example, going forward, sales from online platforms is expected to grow even more. HDFC life is continuously strengthening its distribution network and focusing a lot on direct and online platforms which now contributes 22% in total business of the company. HDFC life is also embedding technologies like Artificial intelligence for text and speech recognition, machine learning and cognitive bots for 24*7 customer support.
HDFC life has also initiated “Futurance”, a program that helps them identify and work with start-ups possessing cutting-edge technologies relevant to our business.

Increased life expectancy

Advancement in healthcare facilities has resulted in an increase in life expectancy and that coupled with the emergence of nuclear families has led to the need for pension-based life insurance products. Overall, on future growth prospects, I would rate it 10/10.

Financials
1. Growth Ratio: 

On growth ratio, I would rate it 10/10.

2. Profitability Ratio:

On profitability, I would rate it 8/10.

3. Customer Centricity:

1. Claim Settlement ratio : Out of 100 people who have claimed the insurance, how many claims are settled.
2. Persistency: How many people have continued the premium payment. 13m means how many people have continued the premium after 13 months and 61 m means how many people have continued the premium payment after 61 months. Normally, people tend to discontinue the premium after a time and hence it is an important criteria to gauge the performance of the insurance company.

Overall, on customer centricity, I would rate it 10/10.

4. Solvency Ratio: 195% which is above the IRDA norms of 150% and debt to equity is 0 which means company is debt free. Hence, on solvency ratio, I would rate it 10/10.

ValuationsAt a PE of 102, HDFC life is trading at higher valuations. PEG ratio of the stock is 11.1 which is very very high.One thing is for sure, you will not get this stock at cheap valuation. Even during the market crash of Mar 20, its PE fell down to the level of 63 only. So you can’t expect this stock at a PE of 15-20. The reason is that it is a growth stock. Everyone knows that the insurance sector has a bright future in India for the next 20-30 years and HDFC life is a leader in private life insurers. In that case, the better strategy would be to invest a fixed sum in this stock every month or keep an eye on this stock and invest on dips.

Conclusion

Overall, HDFC life is a fundamentally superstrong company. However, it is available at high valuations.

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Disclaimer: This article is only for education purpose. Consult your financial Advisor before investing your money.