India’s third largest private sector life insurance company, HDFC Standard Life Insurance’s initial public offering raising up to Rs 8,700 crore kicks off today. There have been four other insurance IPOs in the year so far, including SBI Life Insurance, GIC Re, ICICI Lombard and New India Assurance. Notably, out of the four large insurers garnering Rs 35,000 crore in total, SBI Life Insurance and GIC are trading below their issue prices, ICICI Lombard is trading 2% above the offer price, while New India Assurance, which will list soon, is expected to witness a weak debut. In all the cases, a long list of brokerages had advised investors to subscribe to the issue given long-term potential, some of them adding that the valuations don’t come cheap. Interestingly, HDFC Life IPO is priced at a slight premium compared to SBI Life and ICICI Prudential say brokerages, adding that the slight premium is justified, given its brand and underlying profit margins.
Last month, Deepak Parekh, Chairman of HDFC said, “We have priced it lower because there is fatigue in the market. Insurance firms have not done well. The response has not been good.” HDFC Life has expected to raise up to Rs 8,695 crore at the upper end of the price band through its share sale in a three-day bidding process starting 7 November. The company has set a price band of Rs 275-290 for its IPO, in which HDFC and Standard Life will offload 9.52% and 5.4% respectively. HDFC Life IPO is the first offering by HDFC group after 22 years. The public offer will remain open on 7 November and will close on 9 November. Bids can be made for a minimum of 50 equity shares and in multiples of 50 shares thereafter. Here’s what brokerages are saying about the issue-
“At the upper band of Rs 290, the issue is valued at 4.2x of 2QFY-2018 embedded value (EV) of Rs 14,011 crore, a bit higher than close listed player SBI Life and ICICI Prudential which is trading at 3.6x and 3.3x of 2QFY-2018 EV respectively. However, we believe the slight premium is justifiable, considering, consistent growth across premium categories, improving dividend payout over last 4 years, strong parentage, trusted brand name, highest VNB (Value of New Business) margin (22% for FY2017) and well-balanced business mix. Based on the above positive factors we assign SUBSCRIBE rating to the issue,” said the research firm in its report.
“HDFC Standard Life Insurance (HDFC SL) is the most profitable life insurer based on value of new business (VNB) with VNB (Value of New Business) margin at 22% in FY-17. HDFC SL enjoys a market share of 6.8% in FY17 at industry level (12.7% amongst private players) and they also have the most balanced product mix with ULIP constituting only 35% of the total NB (New Business) basis. HDFC SL has a high share of protection business (the most profitable business segment) at 26.4% of total NB in H1FY-18 and focus to increase further. We believe Operating RoEV (Return on Embedded Value) to improve to 23‐24% (22% currently) and VNB margins to 24% by FY-20. At the upper end of the price band of Rs 290, the company would trade at 2.8x Sep‐19 P/EV which we believe is fairly priced and hence we recommend to Subscribe for long term gains,” observed the research and brokerage firm in its report.
At the price band of Rs 275-290 the issue is priced at ~3.9-4.2x its September-17 Embedded Value of Rs 69.7 per share. We believe the premium valuations compared to ICICI Prudential Life Insurance and SBI Life Insurance are justified due to comparatively higher NBP growth, best in class New Business Margin (NBM) of 22%, consistently high return ratios over the years, higher renewal premium growth over five years (FY12-FY17), lower mis-selling, better death-claims settlement ratio and lowest claims repudiation ratio. We advise investors with a long-term investment horizon to SUBSCRIBE to the issue,” Way2Wealth said in its IPO note.