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00:00Hello and welcome. You're watching the Small and Mid Cap show here on NDTV Profit. I'm
00:15Harsh Saita. With me is Mahima Vatsajani and we're going to talk to Aditya Shah, who's
00:19the founder of Hercules Advisors, about the life insurance pack because that pack is buzzing
00:26on the back of the fact that you have the IRDAI coming in and talking about the surrender
00:32value and changes with regard to surrender value, making it more favorable for policy
00:39holders and consumers to take back some of the policies that they have subscribed to.
00:47Now to try and break this down a little bit more, especially from an insurer standpoint,
00:52Aditya Shah is with us. Welcome, Aditya. Good morning.
00:55Good morning, Harsh. So we've seen that clarity is emerging and what IRDAI is saying is that
01:03in the near term when the policies are issued, insurers must provide some good surrender
01:08value to customers. So clarity has emerged, that's a good point. This is negative for
01:14most of the life insurers. Now we can debate about how much negative is for which insurer
01:19but to some insurers it will be more, to some insurers it will be less. But on the
01:26whole it is negative for the life insurers. So what this basically means is that if somebody
01:30has got an endowment or a participating plan, insurers should offer a higher surrender value
01:39to customers. This IRDAI has done in order to protect the policy holders. We should recollect
01:46that life insurance has a massive amount of mis-selling that really happens. So from
01:50that perspective, it is good from a policy holder perspective, negative for entirely
01:58further sector policy. But over a longer period of time, this should curb mis-selling to some
02:03extent and then the insurance sector should move forward from there. So overall negative
02:08in the short term, positive in the longer term. Understood. Aditya, I want to understand
02:14that from a company perspective, for all these life insurance companies like HDFC Life, SBI
02:19Life, ICICI Pro, what changes will happen to these companies and what does this actually
02:25mean for all of these life insurance companies? So let us get down to the genesis of selling
02:31these products. Generally, a participating or a non-participating plan or a unit plan
02:38or an endowment plan generally come with a higher margin. They come with a margin of
02:42about 30 to 40% whereas a pure pay protection plan comes with a margin of about 15 to 20%.
02:49So what the agents generally tend to do is they tend to push the participating products
02:54which give them a higher margin also. Now, this is purely mis-selling of product that
03:01is really happening. And what IRDAI is saying, of course, if you have done mis-selling of
03:06products, we will give policyholders a chance to give back the policies. And when policyholders
03:14give back these policies, you need to give a higher surrender. So net-net, what is happening
03:19is that IRDAI is trying to check the insurance mis-selling that is happening. Over a longer
03:24period of time, value of new business margins, VNV, for most of these insurance will tend
03:29to come down. Now, how much it will come down, only time will tell. For those who have a
03:34higher participating plan or those who have a lower proportion of term plan in their business
03:41will be the ones who will be the maximum hit. For example, in my opinion, somebody like
03:46an LIC or somebody like a MaxLife or to some extent somebody like an HDFC Life could be
03:52the ones who will be the maximum hit.
03:55Okay, Aditya, got it. Talk to us about what your sense is with regard to companies pivoting
04:04their products as well as tweaking their products to actually suit the current regulations.
04:15What companies you believe are well placed for that? Because it will require some amount
04:22of tweaking from a selling perspective as well. So that's one. Second is from a commission
04:27standpoint, what changes actually?
04:31So, we've seen private insurers like HDFC Life, like ICICI Group, pushing term plans.
04:39The growth on term plans is spectacular for those insurers. Public insurers like LIC are
04:45still lagging behind in term plans. Mind you, insurers make anywhere between 50-100% profit
04:51margins on a term plan. They are just not being pushed because commissions for agents
04:56are really low up there. So now what I feel is going to happen is most insurers will try
05:01to push term plans and private insurers are really very well placed. LIC needs to really
05:08catch up there. Second point is, from a commission perspective, I think that insurance companies
05:16will try to trickle down this higher surrender value to commissions and commissions on participating,
05:23non-participating units or endowment plans would start to see a bit, they should start
05:29to lower because companies do not want their margins to get lowered down because their
05:34valuations will then get fixed. So my perspective is commissions on all other investments plus
05:42insurance plans will start to come down. Commissions on term plans will stay. Companies will start
05:46to push term plans and companies will try to protect their margins to maximum extent
05:52possible first. And therefore, Aditya, do you believe there are enough levers in the
05:56system to help some of these companies maintain their margins? Yes, definitely. So enough
06:03lever, enough demand for term plan is already there. Some companies are growing their term
06:08plan portfolio by about 30-40%. So enough room is available so that companies can protect
06:14their margins. In my opinion, a 1% or a 2% margin hit is a maximum that most of the private
06:21companies will take. For a company like LIC, which has a huge portfolio other than a term
06:27plan in the insurance and the investment product portfolio, there we need to clearly understand
06:33what is going to happen because nearly about 80-90% of LIC's products are insurance plus
06:38investment portfolio that we have seen. Understood. Aditya, any view on which of these companies
06:45have the highest one-year retention rate? So highest one-year retention rate, of course,
06:52LIC continues to be amongst the highest. HDFC Life also is having one of the highest retention
07:01rates. As well as something interesting on HDFC Life and ICICI Plume Life is their growth
07:07on the term plan side of it over the last 2-3 years has been extremely aggressive. HDFC
07:11Life is trading at about 30% or 30% VNP value to business margin and 25-30% for ICICI Plume
07:20Life investment. So I expect all the private insurers to stay in the band of 25-30%. Some
07:28of them could take a short-term hit, but over a longer period of time, 25-30% hit. And I
07:33also expect LIC to start concentrating on pure pay term plans even more aggressively. Got it,
07:41Aditya. Now, I want to try and understand the levers. So one is, of course, you have spoken
07:46about commissions, especially commissions linked to surrender as well as surrender value will
07:54likely go up and likely start to get built in. Talk us through what the current commission
08:01structure is like. If at all, you can give us some insights on that. And where do you
08:06see it go? Because that will be one of the largest levers. Outside of that, is there
08:13any other lever which companies can use except growing non-par quickly to try and maintain
08:21or at least not dilute margins in a big way? So commissions, I have the figures on the
08:31participating insurance and investment products. Companies pay anywhere between 30-40% of
08:39commission. And mind you, these premiums are really very high. Premiums can range from
08:44anywhere between 50,000 to 1 lakh rupees a year. So companies tend to pay about 30-40%
08:51of their premium as a margin, as a commission to the agent. So this, I think, will start to
08:58be set downwards as companies see more and more surrender in the policies. Also, companies
09:06could adjust commissions based on the surrender value. For example, in some years, if a customer
09:14tends to surrender their policy, then the commission could start to be adjusted downwards.
09:19That's the first point. What was the second question that you asked? So outside of commission,
09:27what are the other levers that can help margins? So, I forgot to mention this, that apart from
09:36the participating, on the non-par and the peer-to-peer protection, companies only pay
09:40about 20% margins, 20% commissions. What I think the companies should start to do is,
09:47companies will start to lower the margins, lower the commissions on the participating
09:54investments and insurance products, and start to lower, start to increase the commissions
10:02on the term plans. So what this will do is, term plans are really very profitable for the
10:06companies. 50-100% profit margins are there on term plans. So this will try to protect
10:13the margins that companies have really got. And over a longer period of time,
10:18margins will tend to be anywhere between 25-30% on the private insurer side. Other than these,
10:28I don't think that companies have any other levers that they can really work with.
10:33If any of these private insurers have their margins eroded well below 25%,
10:39there would be an erosion in the profitability of many of these companies. Understood. I'll
10:44say one last quick question. The entire insurance space, I mean all of these insurance stocks have
10:50underperformed in the past 6 months to 1 year. But something like HDFC Life is up almost 3% today.
10:57So going forward, where do you see the value then, your topics basically?
11:04So my topic will continue to remain with HDFC Life, because HDFC Life is one of the most aggressive
11:09life insurers. For the last 1 year, they have seen an integration with Exide Life,
11:15and they have seen the product portfolio slowing down to some extent. So my topic will be HDFC
11:21Life, but I will also look at LIC, where I will look at what improvement LIC is making within their
11:27term plan portfolio and within their new business margins. So number 1 thing, HDFC Life, a close call
11:34on LIC with respect to the improvements that they really make. And also I will like to monitor the
11:43sector for the improvements in margins that occur over the period of next improvements, or if
11:49somebody is not able to control their product portfolio, if the value of new business margins,
11:54which is a very important metric to track, falls below 25% for any of these life insurers,
12:00then it would be really very interesting that those stocks would better deal it.
12:05Okay, thank you so much for all of those insights, Aditya. It's an interesting space to watch out
12:12for, not only because of the underperformance, but also because of the number of things that
12:17are changing in the space and the sector at all points of time from a regulatory standpoint.
12:22So thanks so much for breaking this down for us.
12:25We're also joined by Anushi Vakaria, who tracks the real estate space. But the focus today is
12:32Vellore Estate, and they've recently decided to demerge their hospitality business from the real
12:39estate business. Now to discuss more about this, we have with us Mr. Rahul Pandit, who's the CEO
12:44of Vellore Estate, who joins us now. Welcome to the show, sir. My first question to you is that
12:51demerging the hospitality business from the real estate business, I want to understand what is the
12:56kind of value unlocking that you're seeing here, and what is the key rationale for demerging the
13:01two businesses? And going forward, what are the key initiatives and plans for the hospitality business?
13:09Thank you, Mahima. It's good to be chatting with you, and good to represent Vellore Estate to you.
13:16So the key rationale for doing the demerger essentially is three things. First is value
13:23unlocking in the sector, especially given the strong macros in the environment. And also,
13:29as you know, that Vellore's business primarily is real estate. And after the demerger,
13:37the hospitality's intent is to create a strong, sustainable EBITDA portfolio. And both the
13:44businesses also will attract different sorts of capital stack, delivering superior returns.
13:52So that's the intent. And currently, our intention is to create a 4,300 keys,
13:59upper upscale and luxury portfolio in the country, in some of the densest micro markets across Bombay,
14:07Delhi, and Goa. So currently, we have 484 keys operating between two assets,
14:15which is the Grand Hyatt Goa and the Hilton Mumbai. We are in the midst of creating India's
14:22largest integrated hospitality development at AeroCity Delhi, which is a 4,000 crore
14:30capex project, and it's going to be released by the end of next year. So this will have India's
14:36largest integrated hospitality complex, which is a 779 keys development of St. Regis and Marriott
14:46Marquis, along with 600,000 square feet of office space, and 200,000 square feet of convention
14:54space. In addition to this, we are developing three assets in some of the most marquee
15:01micro markets in Bombay, which is Sahar, BKC, and Worli. So at Sahar, we are developing a 970
15:12keys hotel, along with 450,000 square feet of office. At BKC, it will be an 1175 room hotel
15:21with 200,000 square feet of convention space. And at Worli, it's going to be an 800 room hotel.
15:28So those are our plans right now.
15:58Amish, it's a good question. One is to say, you know, what's the theory supporting this growth? And second is what numbers are we looking at? So we are expecting a stabilized EBITDA in excess of a thousand crores for this portfolio. And to take a quick look at the macros, you know, if you see in India, the aviation sector, which has 771 planes in the sky,
16:28and there are 1400 new planes that have been ordered. So minus 200 aircraft, which are replacement,
16:35this is a 250% jump in our air capacity. And similar macros are going to play out in hospitality,
16:43and especially today, where demand is outpacing supply. So we think that our addition of supply
16:50to key micro markets will deliver sustainable EBITDA over, you know, the continued long term.
17:01Sir, you guided for a thousand crore kind of number, could you give us a timeline for that?
17:06Yeah, so we expect this to be in FY30. Properties, you know, which are under development,
17:13they also stabilize. So currently, we are also going to see a jump up. So as I told you, by the
17:21end of next year, the combo assets at Delhi Aerocity, they are going to operationalize.
17:28And post stabilization, the EBITDA of those assets is going to be 500 crores.
17:33And it's a 50-50 JV with prestige. So our share, our economic interest is going to be 250.
17:40And once we add the three hotels in Bombay, this will be a 1000 crore EBITDA portfolio.
17:48Understood. And that's all on the hospitality side of things.
17:53Can I also get some insights with regard to the real estate side of things? How is the
18:00execution pipeline looking like? What are the new projects that you're going to be coming in with?
18:04And what are the numbers that we're going to start seeing FY25 onwards?
18:09Sure. See, on the real estate side, we currently have over 31 million square feet, which is under
18:17development in MMR. And along with that, our land parcel is over 498 acres today.
18:25And interestingly, Valor, if you see BSE Sensex, you know, it's delivered a 30% increase over
18:33the last year. And at Valor, we have delivered about 200%, 197%. So these strong fundamentals
18:42are going to continue. And we have a more B2B focus. So we are working with, you know,
18:48large reputable developers to bring in, you know, land parcels and supply to fruition in MMR.
18:58Sure, sir. Now coming to the debt side, again, our focus had been to decrease the debt going
19:03forward. But now with the addition of more of these land parcels and the kind of hotels that
19:08we want to add going forward, how is the debt going to look like? And are we looking for more
19:13funding plans in the future? Thank you. That's a good question.
19:17So one of the key imperatives of doing the demerger is also to effectively make Valor
19:24debt-free. And essentially, the new debt would be on the hospitality projects. And you know,
19:31hospitality, you know, it's EBITDA generating and long-term gestation assets. So the total
19:38CAPEX outlay is going to be about 9,000 crores. And we are looking at our one is to one,
19:44debt is to equity plan for the portfolio. Understood. Well, Mr. Pandit, thank you so
19:51much for giving us those insights and taking our time and speaking with us at NDTV Profit.
19:57It was a pleasure talking to you. But with that,
20:00it's all that we have on the show for now. Stay tuned for more news and updates on NDTV Profit.