ADD

HDFC Life Insurance (HDFCLIFE)

Insurance DECEMBER 11, 2019
UPDATE
Coverage view: Attractive

Tech-backed disruptive growth. HDFC Life has invested in developing technology Price (`): 573
backed digital systems and processes to diversify its growth engine, increase operational Fair Value (`): 605
efficiencies and customer satisfaction. The company is a dominant player in the digital
BSE-30: 40,413
ecosystem supported by strong tie-ups with multiple partners, proprietary platforms and
applications. Product innovation, strong brand recognition, digitally enabled distribution
touch points and strategic partnerships will provide competitive advantages. We retain
our positive stance on the company with ADD rating and fair value of Rs605.
Company data and valuation summary
HDFC Life Insurance
Stock data Forecasts/Valuations 2020E 2021E 2022E
52-week range (Rs) (high,low) 646-344 EPS (Rs) 7.4 8.5 9.4
Market Cap. (Rs bn) 1,155.6 EPS growth (%) 16.0 14.6 11.6
Shareholding pattern (%) P/E (X) 77.6 67.7 60.7
Promoters 71.2 NII (Rs bn) 124.3 147.8 174.2
FIIs 15.9 Net profits (Rs bn) 14.8 17.0 19.0
MFs 3.3 BVPS 31.2 34.6 38.4
Price performance (%) 1M 3M 12M P/B (X) 18.4 16.6 14.9
Absolute 0.3 6.5 48.8 ROE (%) 24.9 25.7 25.9
Rel. to BSE-30 0.1 (1.8) 29.4 Div. Yield (%) 0.3 0.4 0.4

Focus on customer centric technology backed innovations

HDFC Life has invested in technological platforms and systems to improve customer lifecycle
management and improve efficiencies for various stakeholders like distributors, sales team and
others. Providing a seamless, simplified, low cost process at every step of the customer’s
lifecycle is of utmost importance. Management guided that technology backed innovations
achieve cost efficiencies over a longer time horizon by benefitting from economies of scope.
Additionally, digital channels and simultaneous data backed risk mitigation measures can
improve operational metrics like persistency, products per customer, claims payout ratio and
reduction of turnaround time. Finally, customer on-boarding for low ticket segments is easier
through digital channels. While competition is rapidly increasing, broader presence and strong
tie-ups with a multitude of partners provides sustainable advantage.

Strong strategic tie-ups and new digital processes will drive growth
HDFC Life has developed proprietary platforms, activated 150+ bots and tied-up with financial
and non-financial digital players (250+) for product delivery and servicing. Apart from strategic
tie-ups, the company has provided service enablers, surrogate platforms and processes to
stimulate growth for these partners. Socio-economic changes, demographic profile alteration,
change in purchase behavior and internet penetration coupled with a multitude of players in a
Nischint Chawathe
hyper-competitive market requires customization and personalization of life insurance products. nischint.chawathe@kotak.com
While early mover advantage will drive growth through digital platforms, continued product Mumbai: +91-22-4336-0887
innovation will provide relative advantage to peers.
M B Mahesh, CFA
mb.mahesh@kotak.com
HDFC Life will remain the industry bellwether; retain positive stance Mumbai: +91-22-4336-0886

We believe that HDFC Life will remain at the cusp of innovation and hence a bellwether for the Dipanjan Ghosh
dipanjan.ghosh@kotak.com
life insurance industry. The company was one of the first players to market online life insurance;
Mumbai: +91-22-4336-0888
other large players have not forayed much into the non-par business (mostly doing annuities),
following a deferred annuity policy launched by the company last year and Sachay Plus early this Venkat Madasu
venkat.madasu@kotak.com
year. Our meetings with the management reassured our faith in HDFC Life’s superior business Mumbai: +91-22-4336-0895
strategy, execution to consistently deliver superior margins and profitability. Our forecasts of
stable VNB margins may as such be revised up over subsequent quarters. At our AV-based fair
value, the business will trade at 4X EV as compared to 2.7-3X for most other players.

Kotak Institutional Equities Research

kotak.research@kotak.com
Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Insurance HDFC Life Insurance

Key takeaways from the analyst meet-‘Techedge’

Technology has been an area of focus as digital innovation eases customer experience at
various touch-points and increases delight thereby providing a competitive advantage. While
investments in digital platforms had started earlier, the company has broadly executed most
of the conceptualized ideas and hence can leverage these processes to deliver superior
process efficiencies.

 Continued investment in technology platforms is of utmost importance. According

to top management, insurance sector needs to re-invent regularly as disruptions are high
and hence needs to invest in new innovations at regular intervals. While product concepts
can be replicated, proprietary technology systems can be difficult to duplicate efficiently.

 Socio-economic changes drive necessity of customer on-boarding through digital

platforms. Millennials are changing the purchase landscape as their intent to purchase
an insurance product post discussion with a representative is gradually decreasing. This
segment of the population believes in making a purchasing decision post searching
multiple platforms. Additionally, socio-economic and macro-economic changes whereby
the gap between inflation and deposit rates has reduced and importance of retirement
solutions has increased.

 Data analytics at the centre of innovation. HDFC Life has 270+ data aggregator
partners. Navigation through data protection norms and circumventing it to find out
critical information of buyers is increasing. Customer profiling to give pre-approved sum
assured is of utmost importance. These data aggregation platforms can be leveraged to
measure customer satisfaction and thereby use predicative analytics to cross-sell or up-sell
products, predict customer touch-points and increase persistency. The company has 150+
bots. This increases the ability to engage with the customer in a more meaningful and un-
ambiguous manner.

 Product innovation along with technological innovation to drive growth.

Click2insure is a new product introduced by HDFC Life which has clubbed advantages of
a term insurance and an equity mutual fund. The IIR of the product is better than an equity
mutual fund if the consumer is invested for >5 years. This is driven by lower management
fee at ~1.35% compared to 2-2.25% for an equity mutual fund. The company has
partnered with boutique mutual funds. The customer needs to be on-boarded in an
efficient manner without complexity.

 Cost optimization of digital platforms is difficult to quantify. Cost optimization is a

function of scale of business, product mix, persistency, cross-selling and up-selling of
products and other parameters. Thus, it is difficult to quantify the lifetime value of
products sold through certain channels which makes it challenging to quantify cost
optimization of digital channels (if any).

Physical, digital world will co-exist; understanding customer preferences is key

Digital tools are used to service customers in an efficient manner and offer a superior value
proposition while customer needs are similar. Understanding the customer journey is
important to disrupt market dynamics. Management believes that the share of digital
channels will increase but physical presence will remain important given the diverse
geographic and demographic profile of its customers. Evolving in the digital space requires
partnership or inorganic expansion via start-ups while protecting the organizational culture
of smaller player. This helps in upgrading existing traditional architecture and innovating
new systems to develop scale.

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HDFC Life Insurance Insurance

HDFC Life has followed a two pronged strategy to evolve in the digital landscape
HDFC Life has over the years invested in building an in-house digitally enabled company to
ease customer service, reduce turnaround time, increase value for other stakeholders and
finally leverage economies of scope.

 Changes to operational model are necessary. While transitioning to a digital backed

model, operational changes were mandatory to shift from tradition operational
procedures. By discussing with various stakeholders and focusing on customer satisfaction
the company transitioned to a technology enabled business model. Initially, HDFC Life
added digital channels like HDFC Life online, Policy Bazaar and Coverfox, then added
ecosystem partners like retailer, telcos and other internet companies and finally enabled
digital platforms like Life 99 (first one-stop solution for retirement solutions) and E 3.

 Change in organizational culture is mandatory. Most enablers of HDFC Life were

outdated. The technology teams suggested agile methodologies for design, implementation
and execution. They suggested other strategies like using global resources for local
customers coupled with personalization, MVP approach, etc. Finally, the company
categorized the overall digital evolution into (1) journey simplification, (2) partner integration,
(3) data management, (4) service simplification, (5) partners and ecosystems drivers.

Journey simplification
The customer on-boarding journey is digitalized, comprehensive and reduces turnaround
time. While tradition models involved various online and offline procedures, the new digitally
enables customer on-boarding process is much simpler.

Traditional operational model resulted in delays for customer on-boarding in a

physical format. Under the tradition model of life insurance purchases, a policy form was
eight pages long, policy issuance took 10 days, conversion was person dependent and the
overall number of steps was high at 40. In 2010, HDFC Life started studying global insurers
to understand changes in customer landscape. Additionally, the company studied changes in
underlying architecture for banks who are trend setters.

 Business transformation was the first step in the digital journey. The company
reimagined the business journey, increased customer capabilities (600+) and enhanced
cyber-security. This was driven to get a 360 degree view of customer decision making.
This reduced policy issuance time to two days, conversion was automated and the
number of steps was reduced to 10-15 from 60 earlier.

 Mobility improved end-to-end purchase journey. In 2014, the company reduced the
overall end-to-end journey of a sales agent (form filling, sales pitch, etc.). This reduced
policy issuance to <4 hours. The new ‘InstaVerify’ application was used to verify >3 mn
customers and 99% of customers were on-boarded digitally. In ‘InstaGo’, geo capability
was leveraged to assign the sales agent nearest to the customer location. The sales agent
can track an on-going application on a mobile.

Increasing awareness and consideration is important on online platforms. In online

platforms, a customer takes 10-15 days for a purchase decision which involves product and
brand discovery. Thus it is important to nudge the customer on digital platforms. Search
optimization is necessary while analytics and targeting is important to increase customer
propensity to buy. HDFC is a pioneer in online ecosystems and has simplified processes to
enable smooth targeting, selling and customer servicing. An important part of the online
journey is to re-target customers who are not interested, up-sell or cross-sell to converted
customers and re-target undecided customers with a better value proposition thereby increasing
conversion per lead. Online business has increased by 89% CAGR during FY2017-19.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Insurance HDFC Life Insurance

 HDFC Life is a dominant player in the online space. HDFC Life is ranked among the
top players in terms of search optimization and consideration. However, a lot of customer
discovery is now a days happening on aggregator platforms. HDFC Life is a dominant
brand for purchases on these platforms. Additionally, the company has invested in
marketing through e-commerce and other digital platforms.

 The company was an early mover in adoption of responsive design framework.

Progressive web application is leveraged to increase customer experience of a mobile
application on other platforms. 83% customers have rated the information as clear and
accurate reduce cognitive overload and decision paralysis. These have led to 76% yoy
increase in direct traffic in November 2018-October 2019. Additionally, time to load a
webpage has improved 56% yoy in November 2019.

 Improvement in customer mobile application has resulted in higher usage. Selling

a product through mobile application is technologically difficult for complex products (ex.
cancer care). However, most products are now sold through the application. A customer
can pay premiums, switch funds and perform other applications through the mobile
application. This has resulted in 83% yoy increase in application downloads in April-
November 2019.

 Continued investment in mark-tech and analytics. Analytics is used for segmentation

and search optimization. The average age of an online customer is lower by 4-5 years and
hence lifetime value is quite high. The company can track the path to conversion and
thereby reduce operation cost. HDFC Life has implemented a machine learning based
search engine marketing strategy (Project Neev) which has led to 84% increase in leads and
reduction in cost/lead by 46%. The machine learning software reduced the number of
customer profiles and helped in better targeting. By leveraging ‘Vogon’ on YouTube, a
single ad campaign was used to project 30+ templates based on the targeted customer.

 Strategic tie-ups with web aggregator platform. The company sells not only
protection policies but also savings and other products on the web aggregator platforms.
The company has 30+ integrations with web aggregators.

 Experience transformation to drive the next leg of growth. 30% of our existing
infrastructure is already on cloud and it will increase to 70% by FY2020E.

Partner integration
>60% of overall business comes from partners. Partners in BFSI segment (help with cross-
selling of financial service products) are savvy in selling financial products while new age
partners like –ecommerce players are naïve through tech-savvy and require assistance in the
insurance domain. The company has 270 partners out of which ~40 are from the e-
commerce domain. There is a paradigm shift where non-financial partners are increasing at
a rapid pace.

 HDFC bank remains the primary partner. HDFC Life has integrated with HDFC bank in
a prudent manner. Every minute almost 1 policy is sold through this channel. The average
time to fill a policy form has reduced to ~10 minutes. 82% cases are issued via STP
(straight through processing. Average policy issuance time is low at 3.2 hours. ~21 fields
are auto-filled in the form by using KYC details available with the bank.

 Other BFSI partners like PayTm deliver robust growth. HDFC Life has sold ~12.1 mn
policies till date through PayTm (~5,000 policies are sold per day). The company sells 3
product variants (increased to 6) in less than 3 clicks. The target segment is people opting
for low ticket insurance policies. By selling policies through this platform, the company
has reduced acquisition cost.

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

HDFC Life Insurance Insurance

 Process changes to accommodate new partners like Airtel. HDFC Life tied up with
Airtel (a telecom player) in May 2019 to sell term policies with prepaid plans. ~3.5 mn
lives have been secured till date (~30,000 customers are on-boarded everyday). The offer
extends life insurance policies to prepaid customers of Airtel (for two select plans). The
challenge was to issue policies in real time. Cloud computing and auto scaling of
infrastructure has helped execute this proposition. And entire under-writing was moved
to cloud platforms. While under-writing is important, risk mitigation is the interplay of (1)
higher volumes and (2) lower sum assured.

Apart from partners, development of platforms to support partners in various scenarios is of

utmost importance to grow in a risk adjusted agile manner.

 New age platforms will drive growth. ‘InstaInsure’ is a new age insurance platform
which leverages (1) deep partner integration (customer information is auto-populated
from partners), (2) KYC documentation requirement has been knocked off (partners
already have it) and (3) creation of non-medical limited for each and every individual
customer is based on economic, demographic, socio-economic and other key data points
to offer pre-approved insurance policies for customers. The company has tied up with
marquee players like Bajaj Finance which will likely deliver robust growth going ahead.
Three integration models (Infinity, Nebula and Andromeda) have been developed for
partners. Back-end APIs help in determining customer eligibility in real time. The company
has integrated with 15+ partners till date.

 Focus on growing the credit protect business. ‘LifeNext’ as a proposition is directed to

grow the credit protect business. This service helps in on-boarding, issuance, payments,
underwriting assistance, servicing, claims and cross-selling for credit protect partners.

While various platforms for partners support growth, HDFC Life uses sales enablers and
other surrogates to stimulate customer purchases and increase ease of sales.

 Sales enablers stimulate growth for partners. ‘HelloSelfie’ was targeted at millenials
(launched with HDFC Bank). It is a convenient manner to purchase policies by
circumventing the time taken to fill a form. (25,000 leads were generated in 1 month)
The selfie predicts age, BMI, etc. and a customer confirms these parameters. People are
interested in knowing the CIBIL score and since the company obtains proprietary
information, it offers customized policies via ‘CreditMart.

 Surrogates additionally drive business. ‘Reco’ is a recommendation engine which

provides customized product suggestions to a customer by leveraging self/auto learning
model. This is helping cross-selling and up-selling of products. ‘NE (nudge engine)’
nudges customers who are at a partner location (digital or physical). Nudging is a five
step process of awareness creation, financial planning, demonstrating need for insurance,
solutions provided by insurance and finally product pitching to drive sales in a surrogate
manner. ‘Quickquote’ uses personal data to generate a quote which is further shared
with a customer through various online platforms.

Data management
One of the most important things to analyze unstructured data is to move towards data lake
and leverage micro service based architecture. The company has 25+ cloud based
applications. Investments in proprietary tools remain high. The company uses a mix of open
source and proprietary tools (ex. Alterian). Additionally, integration between various
technology teams is important. Text AI, Vision AI, machine learning, cognitive bots and
speech AI are the various AI capabilities which HDFC Life is working on presently.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

Insurance HDFC Life Insurance

 Tech AI resolves queries with high accuracy. ‘instA’ is a text AI which is a virtual
assistant for sales and servicing. The application solves 1.3+ mn monthly queries with 99%
accuracy. This application uses back-end NLP tools to resolves 960+ queries over an entire
life-cycle (ex. generating quotes with just 4 inputs, policy servicing, assistance to sales
staff to determine productivity and performance). ‘instA’ is a one-stop solution to
empower sales staff, customer centre employees and customers. ‘Elle’ (chatbot that
solves 350+ queries and has serviced 0.5 mn customer), ‘Neo’ (addresses 9 types of
queries), ‘Spok’ (directs e-mails to appropriate departments and handles ~28% emails)
and ‘Sentilyzer’ (used to find out intention of a customer by reading words in an email)
are other tools which leverage text AI to initiate prompt action based on customer text
queries or suiggestions.

 Vision AI reduces verification time and increases customer propensity to buy.

‘Facesense’ is a face recognition tool for customer verification and to predict authenticity
compared to time consuming KYC process (92% accuracy), ‘Picreader’ is used for form-
filling in a more efficient manner, ‘Agetymer’ uses analytics to showcase the customer an
old version of himself and increases propensity to buy (dataset of 0.1 mn) and ‘Bodmeter’
(dataset of 0.4 mn) tries to find information related to BMI from facial recognition and is
used in association with ‘HelloSelfie’.

 Voice AI is used to improve customer experience. ‘Truecue’ is used for voice based
recognition in four languages (>98% accuracy), ‘Svar’ is leveraged to automate reminder
calls in 14 languages for payment, renewals, etc. (manages 70% of end-to-end calls) and
‘Emolyzer’ is used to measure customer experience and can improve call centre
interactions (70% accuracy). Emolyzer helps to increase persistency by introducing a
customer to senior personnel before termination.

 Machine learning increases efficiency of operational models. The company uses various
machine learning tools to predict customers with high propensity to purchase (42% lift
over existing appointment rates and has increased cross-selling). Other tools help in
identifying possible frauds or early claims (risk models helps to avoid potential claims of
Rs2.1 bn) and identify customers with varied persistency (accurately predicts 70% of the
customers who will pay premium within time. For employees, machine learning helps to
identify teams with high possibility of attrition. For distributors, machine learning helps to
identify risk of inactivation of agents (reduced agent inactivity by 30%).

 ‘iEarn’ helps to reduce skew in incentive structure. The application has developed
customized task lists for individuals in 70+ segments. 70% of the direct sales team
uses iEarn. Presently, the iEarn tool is used for incentivizing the in-house direct sales
team only.

 Cognitive bots are deployed at various stages of customer lifecycle management.

The company works with various third party developers and in-house teams to develop
cognitive bots which help at various stage of customer lifecycle management and
improve internal and external efficiencies. Presently, 150+ bots are live. 59 bots are
assigned for rule based task processing, 50+ for digital operations and 68 for workflow
solutions among others.

Service simplification
Service implication is targeted at improving customer experience. From on-boarding to
purchase and servicing, the ‘insta’ series applications are designed to improve customer
satisfaction. Additionally, 24*7 front end services are provided through bots like ‘ETTY’,
‘ELLE’, ‘NEO’, etc.

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

HDFC Life Insurance Insurance

 Customer App is targeted at self-serving customers. The mobile application is

targeted at self-servicing customers. There is ~0.01 mn + premium renewals per month
which are executed through the application.

 InstaServ helps sales agent for assisted servicing. This is targeted for sales agents in
assisted policy servicing. This has eliminated the entire paper journey for customers.
Turnaround time has reduced to <6 minutes from an average of 20 minutes. ~20,000
services transactions are processed on a monthly basis.

 Instareceipt reduce TAT at branches. This application is a receipting application which

leverages instant OCR based receipting at branches. The application takes 30 seconds for
data entry and reduced turnaround time by 98% (accuracy is ~100%).

 InstaRevival helps easy revival of lapsed policies. This application revives lapsed
policies and has already witnessed 55,000 transactions in 120 days. The application takes
~55 seconds for cases processing.

Robotic process automation for seamless experience is another priority for HDFC Life, As
discussed previously, the company has 150+ live functional bots in 6 functions (32-customer
facing, 10-partner enabling, 81-efficiency and 32-risk mitigation). 138 mn transactions are
processed annually through bots. Most back-ended processes are resolved via bots presently
which were mundane and repetitive. Structured and rule based processes have been
eliminated to increase operational efficiency.

Providing frictionless experience to a customer is of utmost importance in a hyper

competitive environment and HDFC Life is a pioneer in this domain.

 LifeEasy resolves claims in 3 clicks. It is aimed at initiating claims in a seamless manner

driven by analytics based investigation. LifeEasy enables 100% payout on day 1 of
intimation.

 LifeCertificate is used for video certification of old age customers. It is the industry’s
first solution for annuity customers using AI. It is used for verification of life via video and
is executed in 120 seconds.

 Customer 360 is used to anticipate customer needs. This application brings all
customer data in a centralized location in real time and is used to anticipate customer
needs. This platform can be extended to multiple service touch points.

 3 click auto debit using QuickRegister. It is used to automate auto debit facilities. It is
a paperless mandate with zero rejection.

Platforms and ecosystems

Most big companies in the world have transformed from simple platforms to diverse
ecosystems providing a wide gamut of services and products. Platforms selling mortality
(only 1% of Indian working population is covered) are push based, morbidity (63% of health
expenditure is out of pocket compared to 35% global) and longevity (increasing life
expectancy) are outdated. Thus, development of an ecosystem is essential to improve these
segregated platforms.

 One stop retirement planning through ‘Life 99’. HDFC Life has developed a retirement
based solution ‘Life 99’ which provides (1) one view of retirement corpus, (2) readiness
for retirement, (3) a view employee benefits, (4) assist purchase of insurance and
voluntary covers, (5) annuity options for retirement and (6) subscription to NPS and other
tax saving options. ~10,000+ customers have been on-boarded in the past 6 months.

 Employer employee engagement platform. This platform gives the customer a

broader view of (1) health policies available through employer, (2) buy health voluntary
covers (3) answer medical questions, (4) check out latest health benefits, etc. 39
corporates have registered on this platform till date.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

Insurance HDFC Life Insurance

Acquiring capabilities through innovative start-ups

HDFC Life works with third party start-ups/vendors to develop certain back-end technology
platforms. Post that, the company believes in acquiring intellectual property of the
technology and incrementally develop additional capabilities to augment growth.

For example, the company is working with start-ups for gamification of insurance
documents. Additionally, HDFC Life is engaged with a third party to hire sales agents or
other employees with higher stickiness.

The company has an online portal (’Futurance’) where case studies are presented and start-
ups can apply online to co-develop use cases with the company and implement strategies
going ahead.

Exhibit 1: High contribution of high margin non-par savings and term products through online
channels
Channel-wise product mix based on individual APE, March fiscal year-ends, 2017-2019, 1QFY20-2QFY20 (%)

2017 2018 2019 1QFY20 2QFY20

Bancassurance
ULIP 61 64 67 31 35
Participating 30 26 14 5 11
Non-par savings 8 8 5 60 52
Term 1 1 2 2 2
Annuity — 1 2 2 2
Agency
ULIP 26 33 26 7 9
Participating 57 48 40 9 25
Non-par savings 6 5 17 73 54
Term 11 11 12 8 10
Annuity 2 3 5 2 2
Direct
ULIP 47 58 50 34 32
Participating 29 17 8 2 9
Non-par savings 11 9 12 29 29
Term 6 5 6 4 4
Annuity 7 11 24 31 25
Online
ULIP 51 47 43 40 33
Participating 3 1 1 — 9
Non-par savings 1 — 15 28 26
Term 45 52 34 26 30
Annuity — — 6 6 2
Company
ULIP 53 57 55 26 26
Participating 35 28 18 6 12
Non-par savings 8 7 15 58 51
Term 4 5 7 5 7
Annuity 1 2 5 5 3

Source: Company, Kotak Institutional Equities

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HDFC Life Insurance Insurance

Exhibit 2: Share of broker and other channels have increased sharply in 1HFY20
Cannel-wise mix of individual new business premium, March fiscal year-ends, 1HFY19, 1HFY20 (%)

1HFY19 1HFY20

Brokers and Individual Brokers and

others, 4 agents, 11 others, 10 Individual agents,
15
Direct, 17

Direct, 21

Bancassurance, Bancassurance,
67 54

Source: Company, Kotak Institutional Equities

Exhibit 3: We expect 20% operating RoEV and VNB margin of 25-27% for HDFC Life
Key metrics and RoEV movement, March fiscal year-ends, 2013-2022E (Rs bn)
2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Comments
APE 32.8 25.4 29.5 36.1 41.9 55.3 62.6 79.5 93.0 108.8 We assume 15-17% APE growth for FY2021-22E
YoY (%) 17.6 (22.6) 16.1 22.4 16.1 32.0 13.2 27.0 17.0 17.0
VNB 6.0 6.6 7.4 7.4 9.2 12.8 15.4 21.1 25.0 29.0
YoY (%) 27.7 10.0 12.1 24.3 39.1 20.3 37.0 18.5 16
EV movement
Opening EV 48.2 58.7 69.9 88.9 102.3 124.7 152.2 183.0 219.2 261.7
Methodology changes 0.6 1.6 3.5
Assumption change 0.1 1.2 1.6
VNB 6.0 6.6 7.4 7.4 9.2 12.8 15.4 21.1 25.0 29.0
Expected return in force 3.9 4.4 6.1 8.1 9.6 10.4 13.0 14.3 17.1 20.4 Unwinding at 7.8%
Operating variance 0.6 (0.1) (0.3) 3.2 2.2 2.0 2.2 2.0 2.5 3.0 Better persistency, mortality and expenses
Tax changes 1.1
EVOP 9.6 11.1 15.3 18.7 22.2 26.8 30.6 37.4 44.6 52.4
Investment variance 0.9 1.3 4.6 (3.1) 2.5 2.6 3.6 2.5 2.2 2.2
Dividend payout (1.2) (1.7) (2.2) (2.4) (2.0) (3.4) (3.7) (4.3) (4.6)
Closing EV 58.7 69.9 88.1 102.3 124.6 152.1 183.0 219.2 261.7 311.7
Key ratios (%)
VNB margins 13.2 16.4 17.4 20.5 22.0 23.1 24.6 26.5 26.9 26.6 VNB margins at 25-27%
RoEV 21.8 19.1 26.0 16.2 21.8 22.0 20.3 19.8 19.4 19.1
Operating RoEV 19.9 18.9 21.9 21.2 21.7 21.5 20.1 20.4 20.3 20.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

 Insurance HDFC Life Insurance

Exhibit 4: We value HDFC Life at 4X EV FY2021E

Calculation of appraisal value for HDFC Life, March fiscal year-ends, 2021-2022E

2021E 2022E
Embedded value (EV, Rs bn) 262 312
Value of new business (VNB, Rs bn) 25 29
New business multiple (NBM, X) 31.8 31.8
Structural value (SV= VNB X NBM, Rs bn) 795 922
Appraisal value (AV= EV + SV, Rs bn) 1,057 1,234
Appraisal value/ EV (X) 4.0 4.0
Appraisal value/ VNB (X) 42.3 42.5
Value of HDFC Life (Rs/ share) 528 616

Source: Company, Kotak Institutional Equities

Exhibit 5: HDFC Standard Life trades at premium to peers

Valuation comparison of life insurance companies in India, March fiscal year-ends, 2017-2021E
Market
Price cap. Embedded value (Rs bn) VNB margin (%) Price/EV (X) Price/VNB (X) Price/EVOP (X) Operating RoEV (%)
(Rs) (Rs bn) 2017 2018 2019 2020E 2021E 2017 2018 2019 2020E 2021E 2017 2018 2019 2020E2021E 2017 2018E 2019 2020E 2021E 2017 2018 2019 2020E2021E 2017 2018E 2019 2020E 2021E
HDFC Life 573 1,156 125 152 183 219 262 22 23 25 27 27 9.3 7.6 6.3 5.3 4.4 126 90 75 55 46 52 43 38 31 26 21.7 21.5 20.1 20.4 20.3
ICICI Prudential Life 490 704 161 188 216 246 280 10 17 17 20 22 4.4 3.7 3.3 2.9 2.5 106 55 53 43 36 31 19 19 19 16 16.5 22.7 20.2 17.2 17.7
Max Life 509 137 66 75 89 102 115 19 20 22 22 21 2.9 2.5 2.1 1.9 1.7 38 29 22 19 17 17 14 12 10 9 19.9 20.6 21.9 21.1 20.7
SBI Life 966 966 165 191 224 262 309 15 16 18 19 20 5.8 5.1 4.3 3.7 3.1 93 70 56 41 33 33 33 29 24 20 23.0 17.9 17.3 18.0 18.5

Source: Company, Kotak Institutional Equities estimates

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Disclosures

"Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for
which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her
personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will
be, directly or indirectly, related to the specific recommendations or views expressed in this report: Nischint Chawathe,
M B Mahesh, Dipanjan Ghosh, Venkat Madasu."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70%
Equities, within the specified category.

60%
Percentage of companies within each category for which Kotak
Institutional Equities and or its affiliates has provided
50%
investment banking services within the previous 12 months.

40% * The above categories are defined as follows: Buy = We

expect this stock to deliver more than 15% returns over the next
30.9%
28.4% 12 months; Add = We expect this stock to deliver 5-15% returns
30%
over the next 12 months; Reduce = We expect this stock to
21.1% 19.6% deliver -5-+5% returns over the next 12 months; Sell = We
20% expect this stock to deliver less than -5% returns over the next
12 months. Our target prices are also on a 12-month horizon
basis. These ratings are used illustratively to comply with
10%
3.4% applicable regulations. As of 30/09/2019 Kotak Institutional
2.5% 1.0%
0.5% Equities Investment Research had investment ratings on 204
0% equity securities.
BUY ADD REDUCE SELL

Source: Kotak Institutional Equities As of September 30, 2019

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our Fair Value estimates are also on a 12-month horizon basis.

Our Ratings System does not take into account short-term volatility in stock prices related to movements in the market. Hence, a particular Rating may not
strictly be in accordance with the Rating System at all times.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and fair value, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)
and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction
involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and fair value, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or fair value. The previous investment rating and fair value, if any, are no longer in effect for this stock
and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

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