Not Many Are Piling Into HDFC Life Insurance Company Limited (NSE:HDFCLIFE) Just Yet

With a median price-to-sales (or "P/S") ratio of close to 1.6x in the Insurance industry in India, you could be forgiven for feeling indifferent about HDFC Life Insurance Company Limited's (NSE:HDFCLIFE) P/S ratio of 1.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for HDFC Life Insurance

How HDFC Life Insurance Has Been Performing

While the industry has experienced revenue growth lately, HDFC Life Insurance's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on HDFC Life Insurance.

What Are Revenue Growth Metrics Telling Us About The P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like HDFC Life Insurance's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 5.5%. Even so, admirably revenue has lifted 70% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 18% as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 8.8% growth forecast for the broader industry.

In light of this, it's curious that HDFC Life Insurance's P/S sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that HDFC Life Insurance currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

Having said that, be aware HDFC Life Insurance is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of HDFC Life Insurance's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.