HDFC Life's product mix supports VNB margins despite temporary GST impact

Investment View and Valuation

Motilal Oswal Financial Services retains its Buy rating on HDFC Life Insurance and raises the target price to Rs 690 from the July 15, 2026 results update. The target is based on 1.8 times FY28E embedded value.

The broker views the first quarter of FY27 as supportive of the investment case. Agency and non-HDFC Bank channels maintained momentum, while a favourable product mix supported value of new business, or VNB, margins despite the impact of the goods and services tax input tax credit change.

Q1 FY27 Financial Performance

Product Mix and VNB Margin Drivers

The product mix shifted towards higher-value categories. Individual protection accounted for 8% of APE, compared with 6% in Q1 FY26, while management reported protection APE growth of 40% year on year.

Non-par savings contributed 22% of APE and annuity contributed 11%, while the par contribution declined to 15%. Rising protection and non-par savings, along with improving ULIP margins, supported the VNB margin. However, the loss of input tax credit reduced the margin by about 60 basis points during the quarter.

Management expects retail protection to remain a key growth driver, although term-protection growth should normalise as recent tailwinds moderate. It expects protection as a share of APE to remain broadly range-bound, non-par savings to stabilise in the mid-20% range, annuities to gain further share and the ULIP mix to remain broadly stable.

Management also said customers are increasingly adding guaranteed products to their insurance portfolios in a supportive interest-rate environment. Variable annuity products may provide scope for further innovation.

Distribution Performance

Distribution performance was mixed during the quarter. Individual APE from the agency channel grew 20% year on year, while broker and direct channels grew 7% and 19%, respectively. Bancassurance rose only 2% amid heightened competitive intensity at HDFC Bank.

Channels excluding HDFC Bank grew 17% year on year. Management said HDFC Bank business remained subdued because of softer bank-level volumes, although HDFC Life's counter share within HDFC Bank improved sequentially. Management expects the channel's growth trajectory to improve.

Persistency ratios declined year on year at the 13-month, 25-month and 49-month tenures, while 37-month and 61-month persistency improved.

Margin Outlook and Estimates

The goods and services tax input-tax-credit change had a temporary impact on profitability. Management indicated that a further approximately 60-basis-point residual impact should normalise over the coming quarters. Excluding goods and services tax, the VNB margin was 25.6%.

Management expects reported VNB margins to remain around current levels, with underlying margins improving gradually through product mix and operating leverage. It intends to prioritise VNB growth over margin expansion at the expense of growth.

Motilal Oswal maintains its APE estimates but raises its FY27 VNB-margin estimate by 50 basis points following the Q1 FY27 outcome. The broker forecasts a stable 15% growth trajectory from FY26 to FY28E and stable VNB margins, supported by a diversified product mix, rising sum assured—especially in ULIPs—and improving rider attachments. It expects the input-tax-credit effect to be fully absorbed by the first half of FY27.

Key Pressure Points

• Continued softness in HDFC Bank volumes.
• Competitive intensity in bancassurance.
• Normalisation of recent protection-growth tailwinds.
• Weaker persistency at several tenures.
• The temporary profitability effect from the goods and services tax change.