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the
Interaction with the CEO
Business momentum strong
Operating metrics continue improving
We met CEO of HDFC Life Insurance Company. Key takeaways:
Product mix to improve led by rising contribution of Non-participating business:
HDFCLIFE expects ULIP’s share in the overall mix to moderate (after increasing in
2QFY19) and the contribution from other segments to increase. This bodes well for
the company from a mix improvement perspective. The strategy to substitute
Participating with Non-participating business has proved beneficial for HDFCLIFE.
Annuity has emerged as a profitable segment, offering steady growth opportunity.
HDFCLIFE has been able to maintain its lead because of its strong brand name,
product features and customer service. The company fully hedges its annuity
exposure, and thus, is not vulnerable to interest rate movements.
Bancassurance count increasing steadily; dependency on group declining:
HDFCLIFE
has signed up with 201 partners for offering its credit protect product. The company
sees further scope to improve upon its loan penetration and credit protect
attachment rate. The recent NBFC turmoil has impacted growth in credit-linked
products, but HDFCLIFE’s focus on diversifying the origination mix is helping maintain
steady growth. The share of the credit protect business from NBFCs other than
parent has increased to ~70%.
Agency channel contribution to improve gradually; channel economics also
favorable:
HDFCLIFE has added ~37,000 agents over the past 18 months, with the
agent count now at 91,179. The sourcing mix of this channel stands at 11%. Agency
training program is also proving helpful – agents are trained to understand product
dynamics, and thus, the emphasis is on selling profitable products. HDFCLIFE has
maintained strong cost control on this channel and expects profitability to improve
with more operating leverage kicking in.
HDFC Standard Life
Insurance Ltd
Ms Vibha Padalkar
MD & CEO
Ms Vibha Padalkar is MD &
CEO of HDFC life Insurance
Company Ltd. since September
12, 2018 and also serves as its
interim CFO. She joined HDFC
life in August, 2008.
Prior to her appointment, she
has worked in varied sectors
such as Business Process
Outsourcing (WNS Global
Services), FMCG (Colgate
Palmolive (India) Limited) and
Big 4 audit firm (Lovelock &
Lewes (part of PWC). She leads
the finance, legal, secretarial
and compliance, internal audit
and risk functions as well
oversight of pension
subsidiary, HDFC Pension.
Ms Vibha qualified as a
member of the ICAEW in 1992.
She is also a member of the
Institute of Chartered
Accountants of India.
Management KRA is fairly objective and detailed:
HDFC LIFE has in place detailed
and objective KRAs for its top and middle management team, which are defined on a
five-point scale. Some of the KRAs are: (i) new business premium growth, (ii) renewal
premium growth, (iii) 13
th
month persistency, (iv) IGAAP profits, (v) new business margin, (vi) embedded value
operating profit, (vii) employee, distributor and customer satisfaction, (viii) repudiation rate, and (ix) turn-around-
time. This enables HDFCLIFE to measure performances against the assigned targets without any scope of ambiguity.
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 3982 5540
| Parth Gutka
(Parth.Gutka@motilaloswal.com); +91 22 3010 2746
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
| Yash Agarwal
(Yash.Agarwal@motilaloswal.com); +91 22 3846 6693
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

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Persistency improvement – limited room at shorter end:
HDFCLIFE has demonstrated a healthy improvement in the
persistency rate over the past few years. 13
th
month persistency has, thus, improved from 79% in FY16 to 86.6%
now. However, the company believes that an improvement at the longer end will drive bulk of the persistency
improvement, while that at the shorter end will be more calibrated.
Quality of business improving steadily; Aadhar verdict is an opportunity loss, but company does not see any
adverse impact on opex:
Recent market volatility has not affected the growth or persistency trend for the company.
On the contrary, HDFCLIFE has witnessed a healthy demand pick-up for its ULIP products and the trend in
persistency has also improved. HDFCLIFE believes that the Aadhar verdict is an opportunity loss, but it does not see
this posing any opex risk, though turn-around-time may be impacted.
Valuation and view
HDFCLIFE has delivered strong return ratios, with average FY15-18 RoE/RoEV at 25+%/21.5%. We expect the
return ratios to remain strong, led by healthy new business margins, quality underwriting and strong cost
control. The quality of earnings for HDFCLIFE has improved over the past few years, as the share of investment
income and surrender profits has declined.
HDFCLIFE remains positive on its margin trajectory and sees strong room to grow its Protection business. Lower
FMC charges at 1.35% (v/s MFs) pre-empt the risk of any regulatory intervention to rationalize product charges.
We expect HDFCLIFE to deliver new business margin of ~25% in FY20 and new business value of INR21.1b, while
operating RoEV is likely to pick up to ~22%. This will be supported by further improvement in operating metrics
(business mix, persistency and cost). We, thus, expect HDFCLIFE to deliver CAGR (FY18-20) of 24.1% in new
business APE and 28% in VNB. We value HDFCLIFE at INR475 per share (from INR450) as we roll forward our
valuation. Our target price corresponds to 4.0x Sep’20E EV. Maintain
Buy.
the
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Exhibit 1:
Existing business surplus has been increasing, signifying growing profitability of
back book
New Business Strain (INRb)
Existing business surplus (INRb)
19.1
12.7
7.9
14.5
8.2
14.6
8.9
11.1
9.3
5.5
-7.7
-7.1
-10.6
-4.8
-6.3
11.7
6.7
the
PAT (INRb)
-6.4
FY15
FY16
FY17
FY18
1HFY18
1HFY19
Source: Company, MOSL
Exhibit 2:
Margins are expected to improve with the increasing share of protection
NBM
19.9%
FY16
22.0%
FY17
23.2%
FY18
24.8%
FY19e
25.4%
FY20e
22.4%
1HFY18
24.3%
1HFY19
Source: Company, MOSL
Exhibit 3:
Overall persistency has improved across the curve
13th Month
25th Month
37th Month
49th Month
61st Month
1QFY18
1HFY18
9MFY18
12MFY18
1QFY19
1HFY19
Source: Company, MOSL
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the
Story in charts
Exhibit 4:
First year premium and renewal premium would
be led by product innovation and improved persistency
First year premium growth
30%
25%
20%
15%
10%
5%
0%
30%
23%
18%
13%
5%
11%10%
13%
24%
21%
56%
5%
9%
30%
53%
4%
9%
35%
57%
5%
9%
28%
58%
5%
8%
29%
59%
7%
11%
23%
Renewal premium growth
Exhibit 5:
Individual APE product segment composition
Participating
Non-par (Protection)
Non-par (savings)
ULIPs
Source: Company, MOSL
Source: Company, MOSL
Exhibit 6:
Total expense growth exceeded NWP growth led
by higher investments in technology and marketing
NWP growth
Commission growth
Total exp growth
Exhibit 7:
Total expense to average AUM has been trending
down
Total expense / Avg AUM
8.4%
6.3%
5.5%
4.0% 3.6% 3.6% 3.8% 4.3% 4.0%
Source: Company, MOSL
Source: Company, MOSL
Exhibit 8:
Solvency ratio remains well above regulatory
requirement
Solvency Ratio
Regulatory requirement
Exhibit 9:
EV showed healthy growth of 17% for 1HFY19
220
180
140
100
60
EV (INR bn)
Source: Company, MOSL
Source: Company, MOSL
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the
Financials and Valuations
Income statement
Technical account (INRm)
Gross Premiums
Reinsurance Ceded
Net Premiums
Income from Investments
Other Income
Total income
Commission
Operating expenses
Total commission and opex
Benefits Paid (Net)
Chg in reserves
Toal expenses
Prov for doubtful debts
Profit before tax
Tax (incl. Service tax and GST)
Surplus / Deficit
Shareholder's a/c (INRm)
Transfer from technical a/c
Income From Investments
Total Income
Other expenses
Contribution to technical a/c
Total Expenses
PBT
Prov for Tax
PAT
Growth
Premium (INRm) & growth (%)
New business prem - unwtd
New business prem - WRP
Renewal premium
Total premium - unwtd
New bus. growth - unwtd
New business growth - APE
Renewal premium growth
Total prem growth - unwtd
Premium mix (%)
New business - unwtd
- Individual mix
- Group mix
New business mix - WRP
- Participating
- Non-participating
- ULIPs
Total premium mix - unwtd
- Participating
- Non-participating
- ULIPs
Indi prem sourcing mix (%)
Individual agents
Corporate agents-Banks
Direct business
Others
FY16
163,130
(1,342)
161,788
17,906
972
180,665
7,018
18,718
25,737
82,419
59,281
167,437
3,631
9,597
3,347
6,250
7,181
1,688
8,975
214
380
626
8,349
166
8,183
4%
64,872
36,156
98,258
163,130
18.1%
13.5%
5.2%
10.0%
FY17
194,455
(1,706)
192,749
111,406
1,389
305,544
7,920
23,853
31,773
100,004
160,548
292,324
3,743
9,476
3,394
6,083
7,863
2,269
10,132
680
354
991
9,141
220
8,921
9%
86,210
41,534
108,245
194,455
32.9%
14.9%
10.2%
19.2%
FY18
235,644
(1,934)
233,710
85,946
2,703
322,359
10,749
31,593
42,342
131,114
133,223
306,679
9
15,670
4,725
10,946
10,022
2,803
12,955
125
1,567
1,697
11,267
177
11,090
24%
113,496
53,996
122,148
235,644
31.7%
30.0%
12.8%
21.2%
FY19E
289,378
(2,791)
286,586
112,478
3,839
402,903
13,642
34,130
47,772
139,804
195,749
383,325
419
19,160
5,999
13,160
12,520
3,605
16,256
144
1,880
2,029
14,227
612
13,615
23%
145,275
66,941
144,103
289,378
28.0%
24.0%
18.0%
22.8%
FY20E
357,059
(3,575)
353,484
161,752
4,330
519,566
16,450
41,995
58,445
168,439
268,530
495,415
545
23,606
7,171
16,435
15,514
4,520
20,164
162
2,350
2,516
17,647
971
16,677
22%
183,046
83,165
174,013
357,059
26.0%
24.2%
20.8%
23.4%
56.4%
43.6%
27.1%
18.2%
54.7%
26.8%
20.5%
52.8%
13.5%
68.1%
12.0%
6.4%
48.7%
51.3%
30.0%
21.5%
48.5%
25.9%
27.4%
46.7%
15.5%
61.1%
14.9%
8.6%
52.4%
47.6%
24.8%
22.7%
52.5%
24.9%
31.5%
43.6%
13.2%
58.8%
19.3%
8.6%
58.0%
42.0%
31.0%
23.7%
45.3%
26.5%
33.1%
40.5%
19.5%
57.3%
16.4%
6.8%
62.0%
38.0%
31.3%
24.1%
44.6%
27.2%
34.4%
38.4%
22.4%
52.6%
17.5%
7.5%
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the
Financials and Valuations
Balance sheet (INRm)
Sources of Fund
Share Capital
Reserves And Surplus
Shareholders' Fund
Policy Liabilities
Prov. for Linked Liab.
Funds For Future App.
Current liabilities & prov.
Total
Application of Funds
Shareholders’ inv
Policyholders’ inv
Assets to cover linked liab.
Loans
Fixed Assets
Current assets
Total
Operating ratios (%)
Investment yield
Commissions / GWP
- first year premiums
- renewal premiums
- single premiums
Operating expenses / GWP
Total expense ratio
Claims / NWP
Solvency ratio
Persistency ratios (%)
13th Month
25th Month
37th Month
49th Month
61st Month
Profitability ratios (%)
NBP margin (%)
RoE (%)
RoIC (%)
EVOP as % of IEV
RoEV (%)
Valuation data points
Total AUMs (INRb)
- of which equity AUMs (%)
Dividend %
Dividend payout ratio (%)
EPS, INR
Value of new business (INRb)
Embedded Value (INRb)
EV per share (INR)
VIF as % of EV
P/VIF (%)
P/AUM (%)
P/EV (x)
P/EPS (x)
FY16
19,953
12,046
31,586
244,543
457,270
7,055
26,011
766,465
26,402
258,629
457,270
931
3,964
19,270
766,465
2.5%
4.3%
17.4%
1.2%
0.1%
11.5%
15.8%
50.5%
198%
79.0%
67.0%
60.0%
63.0%
50.0%
19.9%
28.5%
37.8%
20.9%
16.1%
742
40%
9%
26%
4.1
7.4
102.3
51.0
68%
11.5
108%
7.8
97.1
FY17
19,985
18,278
38,263
323,827
508,065
8,668
37,753
951,061
32,314
346,915
538,005
479
3,535
29,677
951,061
12.6%
4.1%
17.7%
1.3%
0.1%
12.3%
16.3%
51.1%
192%
81.0%
73.0%
64.0%
58.0%
57.0%
22.0%
25.5%
41.0%
21.8%
21.9%
917
41%
11%
30%
4.5
9.1
124.7
62.2
67%
9.6
87%
6.4
89.0
FY18
20,126
27,064
47,492
423,193
545,982
35,464
46,464
1,104,815
40,703
453,471
571,854
187
3,414
11,085
1,104,815
8.4%
4.6%
18.4%
1.3%
0.8%
13.4%
18.0%
55.2%
192%
87.1%
77.4%
70.9%
62.2%
51.0%
23.2%
25.8%
50.1%
21.5%
22.0%
1,066
39%
14%
30%
5.5
12.8
152.1
75.8
68%
7.7
75%
5.2
72.0
FY19E
20,126
37,045
57,473
499,396
697,662
42,222
51,110
1,347,864
55,443
539,681
697,662
236
3,824
51,018
1,347,864
9.1%
4.7%
19.4%
1.4%
0.4%
11.8%
16.5%
47.9%
180%
88.4%
80.0%
72.2%
64.7%
51.5%
24.8%
25.9%
61.0%
22.4%
18.6%
1,293
41%
15%
27%
6.8
16.6
180.4
90.0
68%
6.55
62%
4.4
58.8
FY20E
20,126
49,483
69,911
628,394
837,194
50,426
66,443
1,652,369
61,950
687,313
837,194
293
4,397
61,221
1,652,369
10.6%
4.6%
18.7%
1.4%
0.5%
11.8%
16.4%
46.8%
176%
88.9%
81.1%
73.7%
65.2%
52.0%
25.4%
26.2%
74.7%
22.4%
19.1%
1,586
42%
18%
25%
8.3
21.1
214.8
107.1
67%
5.55
50%
3.7
48.0
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Explanation of Investment Rating
Investment Rating
Expected return (over 12-month)
BUY
>=15%
SELL
< - 10%
NEUTRAL
< - 10 % to 15%
UNDER REVIEW
Rating may undergo a change
NOT RATED
We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the
inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend.
Disclosures
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
Motilal Oswal Securities Ltd. (MOSL)* is a SEBI Registered Research Analyst having registration no. INH000000412. MOSL, the Research Entity (RE) as defined in the
Regulations, is engaged in the business of providing Stock broking services, Investment Advisory Services, Depository participant services & distribution of various financial
products. MOSL is a subsidiary company of Motilal Oswal Financial Service Ltd. (MOFSL). MOFSL is a listed public company, the details in respect of which are available on
www.motilaloswal.com.
MOSL is registered with the Securities & Exchange Board of India (SEBI) and is a registered Trading Member with National Stock Exchange of India Ltd.
(NSE) and Bombay Stock Exchange Limited (BSE), Multi Commodity Exchange of India (MCX) & National Commodity & Derivatives Exchange Ltd. (NCDEX) for its stock broking
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any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the
specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOSL even
though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report
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Research Analyst views on Subject Company may vary based on Fundamental
research and Technical Research. Proprietary trading desk of MOSL or its associates maintains arm’s length distance with Research Team as all the activities are segregated from
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10 MOSL has not engaged in market making activity for the subject company
the
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The associates of MOSL may have:
-
financial interest in the subject company
-
actual/beneficial ownership of 1% or more securities in the subject company
-
received compensation/other benefits from the subject company in the past 12 months
-
other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever
on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of
MOSL even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report.
-
acted as a manager or co-manager of public offering of securities of the subject company in past 12 months
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be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the
company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies)
-
received compensation from the subject company in the past 12 months for investment banking / merchant banking / brokerage services or from other than said services.
The associates of MOSL has not received any compensation or other benefits from third party in connection with the research report
Above disclosures include beneficial holdings lying in demat account of MOSL which are opened for proprietary investments only. While calculating beneficial holdings, It does not
consider demat accounts which are opened in name of MOSL for other purposes (i.e holding client securities, collaterals, error trades etc.). MOSL also earns DP income from
clients which are not considered in above disclosures.
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the
research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.
Terms & Conditions:
This report has been prepared by MOSL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and
may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent
of MOSL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in nature.
The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty,
representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The
report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial
instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. MOSL will not treat recipients as
customers by virtue of their receiving this report.
Disclaimer:
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or
distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for
informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing
in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances.
The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this
document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this
document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views
expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade
securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of
the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and
should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make
modifications and alternations to this statement as may be required from time to time without any prior approval. MOSL, its associates, their directors and the employees may from
time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to
perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a
separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of
information that is already available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and the Company may or
may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on,
directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or
entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law,
regulation or which would subject MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all
jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither
the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue
or lost profits that may arise from or in connection with the use of the information.
The person accessing this information specifically agrees to exempt MOSL or any of its affiliates
or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or employees responsible for any such misuse
and further agrees to hold MOSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing
this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980
4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080
1000. Compliance Officer: Neeraj Agarwal, Email Id:
na@motilaloswal.com,
Contact No.:022-38281085.
Registration details: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412.
AMFI: ARN 17397. Investment Adviser: INA000007100. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual
Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd.
is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. *Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate
products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products.
* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National
Company Law Tribunal, Mumbai Bench. The existing registration no(s) of MOSL would be used until receipt of new MOFSL registration numbers.
the
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