Reblog: HDFC Standard Life IPO Review

IPO Snapshot:

HDFC Standard Life Insurance is entering the primary market on Tuesday 7^thNovember 2017, with an offer for sale (OFS) of up to 29.98 crore equity shares of Rs. 10 each, by both the promoters HDFC (64% of OFS) and Standard Life (36% of OFS), in the price band of Rs. 275 to Rs. 290 per share. Representing 14.92% of the post issue paid-up capital, OFS will raise Rs. 8,695 crore at the upper price band and will close on Thursday 9^th November. Listing is likely on 17^th November.

Company Overview:

HDFC Standard Life, HDFC’s 61.21% subsidiary, with 34.75% owned by foreign partner Standard Life, is India’s 3^rd largest private sector life insurer, after ICICI Pru and SBI Life, based on market share of 16.5% among private insurers, on FY17 total premium.

Like listed peers, bancassurance remains the largest distribution channel for the company, accounting for 54% of H1FY18 NBP, followed by direct sales channel at 38%. Unlike peers, individual agents account for only 6% of the NBP, which has resulted in the highest commission ratio and expense ratio, among the top 3 private life insurers:

Company’s product mix, however, remains one of the most enviable in the market, due to bigger pie of highest-margin-earning protection business, which leads to industry-topping margins of 21.6% for FY17:

Company’s customer servicing is fair, with highest claim settlement ratio and a low mis-selling ratio. Its persistency ratio, however, for both newer and older policies, is not the best-in-class:

Financials:

For FY17, HDFC Life earned net premium of Rs. 19,275 crore, up 19% YoY, on total revenue of Rs. 30,555 crore, reporting PAT of Rs. 887 crore, which is lower than both SBI Life and ICICI Pru. However, one can argue that accounting profit is not a true reflection of the actuarial profitability of life insurance business, given its complex and long term nature of business.  .

For H1FY18, HDFC Life’s net premium stood at Rs. 9,051 crore on total revenue of Rs. 14,415 crore, leading to PAT of Rs. 554 crore. On an equity of Rs. 2,006 crore, EPS for FY17 and H1FY18 stood at Rs. 4.42 and Rs. 2.76 respectively. Company has net worth of Rs.4,463 crore (30-9-17), leading to BVPS of Rs. 22.25. HDFC holds 61.21% stake and Standard Life 34.75% in the company. Post IPO, their holding will reduce to 51.69% and 29.35% respectively. Azim Premji Trust holds 0.94% stake in the company, with balance 3.10% held by the senior management team.

While solvency ratio of all three is above IRDA prescribed threshold of 1.5x, ICICI Pru’s is stronger at 2.8x vs 2.1x for SBI Life and 2.0 for HDFC Life. At Rs. 1.3 lakh crore, AUM of ICICI Pru is also the largest.

At 22.4%, HDFC Life has the highest Value of New Business (VNB) Margin. However, ICICI Pru has reported 70% YoY jump in VNB for H1FY18, which was less than 20% for the other two, strengthening former’s margins to 11.7% in H1FY18, from 10.1% in FY17. Given boom in the equity markets, ICICI Pru, with product mix tilted towards ULIPs, is also likely to do well over the immediate few quarters.

Valuation:

At Rs. 290 per share, HDFC Life will have a market cap of Rs. 58,160 crore, which leads to Price/Embedded Value multiple of 4.15x, based on H1FY18 embedded value, which is a substantial premium to both the listed peers – ICICI Pru’s current multiple of 3.25x and SBI Life’s 3.69x.

Company Chairman Mr. Deepak Parekh had, in the 1990s, stated that IPOs which leave money on the table tend to enjoy higher shareholder repute in the long run. If company claims to have left even 10% on the table in the current IPO, resulting Price-to-embedded value multiple comes to 4.6x, which is definitely very steep, by all means and counts.

Moreover, just last week, Mr. Parekh, in a press conference to announce company’s public offer, quoted that ‘If you want to flip on day 1, don’t buy. Insurance is a long term business.’ When the company itself is saying so, we judge their wisdom and judgement, and hence not much is left for us to comment on the listing gains.

Having said that, over the long-term, the stock holds potential – Given low insurance penetration levels and booming economy, there is room for all three players to growth, with each demonstrating strength on some parameter on the other – either bigger market share, wider distribution reach, stronger product mix. However, purely from a valuation perspective, IPO of HDFC Life is priced at a premium, like every HDFC! HDFC Bank quotes at the highest PBV multiple of 4.25x (which once crossed 5x about a year ago, and was the highest multiple for any bank globally) when average for private banks in India is 3x. Home loan leader HDFC rules at PBV multiple of 4.6x versus housing finance companies peer set of 3x, and HDFC’s 57.99% subsidiary Gruh Finance also trades at a very steep PBV multiple of 12x. No doubt though, HDFC stocks have created wealth for investors over the long term. Hence, if one can hold this gem in one’s portfolio purely from the long term perspective, one likely to reap bountiful return. Institutions have demonstrated this patience and commitment, but can the retail investors too?

Conclusion:

Marquee pedigree and superior product mix are key positives for the company. But lack of near-term triggers, premium valuations, company’s wisdom on listing gains, poor performance of recent insurance IPOs do not leave much room for immediate returns. One can look to invest only with a long term investment view.

The original review is penned by Geetanjali Kedia, appears on sptulsian.com and is available here.