HDFC Standard Life IPO gets a thumbs up from analysts
Mumbai: Analysts have given a thumbs up to the HDFC Standard Life Insurance Co. Ltd’s Rs8,695 crore initial share sale that opened on Tuesday, citing fair valuations, and better return and margins prospects going ahead, owing to strong prospects for the life insurance industry in the world’s second-most populated country.
This would be the fifth insurance company heading for an initial public offering (IPO) this year, and the second largest this year after General Insurance Corp. of India Ltd’s Rs11,372 crore initial share sale last month.
The IPO, which is a pure offer for sale, will see the two promoters of the life insurer—Housing Development Finance Corp. (HDFC) and Standard Life—sell 299.82 million shares. The public offering will close on 9 November.
At the upper end of the price band, HDFC Standard Life Insurance will be valued at Rs58,277 crore. The IPO will see a dilution of 14.92% stake. HDFC and Standard Life will fetch Rs5,546.1 crore and Rs3,148.8 crore, respectively.
HDFC Standard Life’s total new business premium for fiscal years 2015, 2016, 2017 and the six months ended 30 September were Rs5,492 crore, Rs6,487 crore, Rs8,696 crore and Rs4,403 crore, respectively, data from draft prospectus showed.
Between fiscal 2015 and fiscal 2017, its annualised premium equivalent grew by a CAGR (compounded annual growth rate) of 14.5%.
HDFC Standard Life enjoys a market share of 6.8% in FY17 at industry level, and 12.7% among private players. It also has the most balanced product mix with Ulips (unit-linked insurance plans) constituting only 35% of the total new business (NB).
Prabhudas Lilladher analysts said they believe operating RoEV (return on enterprise value) will improve to 23-24%, from 22% currently) and VNB (value of new business) margins will rise to 24% by FY20, from 22% in FY17.
“At the upper end of the price band of Rs290, the company would trade at 2.8 times September 2019 P/EV (price to enterprise value) which we believe is fairly priced and hence we recommend to Subscribe for long term gains,” Prabhudas Lilladher analysts said in the note.
In fiscal 2017, HDFC Standard Life’s new business premium grew 34% to Rs8,696.3 crore, from the previous year. As on 30 September, the firm had assets under management of Rs99,530 crore.
“We are positive on HDFC Life for long term as life Insurance sector in India provide huge opportunities for growth,” Motilal Oswal Securities Ltd said in a 3 November note.
According to Motilal Oswal, at the upper price band, the issue is priced at P/BV (price to book value) of 15.2 times and P/EV (price to enterprise value) of 4.1 times fiscal year 2017 post issue. “While the valuation looks higher compared to other listed financial companies (like non-banking finance companies, insurance companies and private banks), we believe premium valuations are justified,” Motilal Oswal analysts Yogesh Hotwani and Pooja Doshi said in the note, while recommending a “subscribe” rating for the IPO, for long-term investment.
They said such premium was justified due to huge potential for growth as insurance in India is highly under-penetrated, strong financial performance with consistent and profitable growth, focus on customer centricity enabling growth across business cycles, consistently growing multi-channel distribution footprint and consistent and strong ROEs (return on equities).
Others shared the view.
“Factoring the parentage brand of ‘HDFC’, strong corporate governance and better than industry VNB margins along with high dividend payouts, we believe valuations are reasonable. We recommend that investors apply to the issue,” ICICIdirect.com analysts said in a 3 November note.