RBI order insures gains for HDFC Life stock; analysts see up to 83% upside

RBI's permission to increase stake in subsidiaries puts an end to the overhang on the stock, said Motilal Oswal in a note

The rally in shares of HDFC Life Insurance Company may have more legs as the Reserve Bank of India's diktat, allowing HDFC Bank/HDFC Ltd to increase their stake in the insurance arm to over 50 per cent, has removed a key overhang, analysts said.

Last week, private sector lender HDFC Bank informed the exchanges that the RBI has allowed HDFC Bank or HDFC Limited to increase their shareholding in HDFC Life and HDFC ERGO to more than 50 per cent prior to the effective date of the merger, assuaging concerns that the holding may have to be reduced to around 30 per cent.

"With HDFC Life becoming a direct subsidiary of HDFC Bank, it will have a two-fold effect on HDFC Life. First, its share in the HDFC Bank channel (currently 50 per cent) is likely to gradually improve; and second, the cost of distribution in the HDFC Bank channel is likely to improve and, hence, aid margins," said Emkay Global in a note

That apart, the overhang of a possible 19 per cent stake sale by HDFC-HDFC Bank has gone away; rather, HDFC-HDFC Bank will acquire (fresh or secondary) over 1.35 per cent stake before the merger-completion.

This, Motilal Oswal Financial Services, observed, would enable an additional buying of Rs 2,200 crore for HDFC Life.

Shares of HDFC Life Insurance surged 6.6 per cent to Rs 547.5 on the BSE on Monday with the average trading volume at the counter jumping over three-fold. A combined around 24.15 million equity shares changed hands on the counter on the NSE and BSE. By comparison, the benchmark S&P BSE Sensex ended 0.67 per cent higher.

"The management has not quantified how much they will increase the stake to. The theoretical limit is 100 per cent. We believe it should be between 50-60 per cent. In the analyst day last year, management had explained that a higher stake would also mean higher cross sell," noted Nuvama Institutional Equities.

Currently, HDFC Ltd holds 48.6 per cent stake in HDFC Life, and 49.98 per cent in HDFC Ergo.

A screaming buy?

Since the announcement of the merger last year, shares of HDFC Life have tumbled around 7 per cent on the BSE, as against 0.6 per cent gain in the benchmark S&P BSE Sensex.

Moreover, the shares had come under heavy selling pressure after the Union Budget for 2023-24 proposed to tax income from traditional policies with an annual premium of over Rs 5 lakh. Between February 1 and April 21, the shares cracked over 11 per cent, while the benchmark Sensex added 0.2 per cent on the bourses.

Going ahead, the sharp correction since the Budget, accompanied by low penetration of insurance products in India (4.2 per cent in FY22), offers an attractive entry point, analysts said.

Emkay Global has upgraded the stock to 'BUY', with a revised target of Rs 650. "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.

"Business -wise, the latest business figures of HDFC Life in the March quarter show stellar results. Since insurance is among the select few sectors that has a perennial growth outlook, the stock looks attractive at current levels after a 17-per cent correction from its 52-week high," said G Chokkalingam, founder and head of research at Equinomics Research.

The premium for HDFC Life Insurance in the month of March grew by 83 per cent, while it was up 16 per cent for FY23. It also saw retail Annual Premium Equivalent (APE) growth of 118 per cent in March on a year-on-year basis.

AK Prabhakar, head of research at IDBI Capital, meanwhile, opined that investors should hold the stock from a 2-3 years' perspective, expecting returns of 15 per cent compounded annual growth rate (CAGR) during the period.

Overall, consensus Bloomberg estimates project 14 per cent upside in HDFC Life stock over the next one-year, with target prices ranging from Rs 468 to Rs 1,000.