In today’s times of ever-changing technology, going digital is hardly considered a differentiating factor. You may sell products online, but so does everyone else.
So, why are investors and analysts enamoured by HDFC Life Insurance Co. Ltd’s pitch for tech-based insurance? The stock gained nearly 2% on Thursday and has clocked an impressive 51% rise so far in 2019.
Earlier this week, the insurer drew up a presentation showing how its own digital platform and tie-ups with others are enabling it to woo more customers. “While we have invested significant management bandwidth and resources so far, we are acutely aware of the need to continue investing and treading this path of constant evolution, with technology as a key differentiator," it said in the presentation.
But unless the progress is seen in real profitability metrics, investors should avoid using this digital talk to add froth to an already pricey share. To be fair, HDFC Life’s profitability is far superior compared to the industry. That, and its strong record of growth, are enough to buttress valuations.
The insurer’s value of new business margin has improved from 24.3% in the first half of FY19 to 27.5% in H1 FY20. Growth in new business premium has only risen by leaps and bounds between FY17 and FY20. But the multiple of over four times its estimated embedded value for FY21 captures all this, and more. As analysts at Motilal Oswal Financial Services Ltd said: “While we remain positive on the company, the robust 49% stock return over the past year implies limited upside to our target price."
Granted that hooking millennials faster to insurance can be effective only when it is sold online or through mobile phones. Even so, the process is hardly a differentiator versus the competition.
For now, analysts are convinced that HDFC Life will have an edge over competition based on its tech-based servings. But as Jefferies India Pvt. Ltd pointed out, profitability will also require getting the pricing right. “Alongside this, the key to profitability will also require balancing risk pricing with the customer focus, and alignment of regulator to gradually move to digitally-enabled insurance."
Another factor to monitor will be cost savings that digitization brings. So far, the operating expenses to total premium have only increased. For the first six months of FY20, the operating expense ratio was 19%, up from 18% in the corresponding period of last year. The salutary effects of going digital should also be visible on expenses. Until then, HDFC Life investors will be better off holding on to their exuberance on the stock.