After Max Financial Services Ltd announced its swap ratio with HDFC Life Insurance Ltd last month, the former’s shares now reflect the value of the combined entity. As such, investors can already get a clean, direct exposure to one of the country’s largest insurance plays through Max. Even so, there has been a fair bit of excitement around the insurance sector, and even though ICICI Prudential Life Insurance Co. Ltd may have lost the first-mover advantage to HDFC, its initial public offering (IPO) is expected to be received well.
To start with, it has been valued at a 10-20% discount to the HDFC-Max combine, according to calculations by Nomura Financial Advisory and Securities (India) Pvt. Ltd. At the price band of Rs300-324 per share, the life insurer is valued at Rs43,060-47,957 crore. Nomura Securities puts the insurer’s embedded value (EV) for fiscal year 2018 at Rs17,520 crore and the IPO price would be a multiple of 2.5-2.7 times estimated FY18 EV.
Recall that the merger of HDFC Life-Max Life Ltd last month had valued HDFC Life at Rs45,687 crore and the merged entity at Rs66,508 crore. Analysts peg the FY18 EV of the merged company at Rs21,290 crore that puts the transaction at a multiple of 3.5 of EV. But Nomura’s analysts say that after adjusting for cost synergies expected from the HDFC Life-Max merger and after excluding excess capital, ICICI Prudential’s valuations are at 2.9-3.2 times EV, and HDFC-Max’s valuation stands at 3.6 times.
Note that ICICI Prudential has the highest proportion of revenue coming from unit-linked insurance plans (Ulips)—they account for 82% of its new business premium. Ulips are cyclical and so some of the key ratios could be prone to its vagaries. Analysts at Nomura also note that ICICI Prudential’s new business profit is lower than peers that have bank-led insurance models. Besides, a relatively low proportion of its premium is related to the protection business, which also results in lower margins. As such, it’s not surprising that the ICICI Prudential IPO has been priced much cheaper vis-à-vis the HDFC-Max combine.
Also note that when juxtaposed with the earlier stake sale of ICICI Bank to Temasek and PremjiInvest, its valuations look dearer. ICICI Bank sold a 6% stake for around Rs1,950 crore valuing the insurer at Rs32,500 crore. This is at a multiple of 1.85 of the FY18 EV. As pointed earlier, what will help from a demand perspective is that insurance penetration in India is still low. Premium as a percentage of gross domestic product was a mere 2.7% in calendar year 2015. The potential is there for private insurers to milk this opportunity.