HDFC Standard Life Insurance IPO – Everything Good Already Priced In

IPO Rating – 46 (Invest with limited exposure)*

About the Issue

HDFC Standard Life (HDFC SL), a joint venture between HDFC and Standard Life Aberdeen through its wholly owned subsidiary, Standard Life becomes the fifth insurance company and third life insurance company to hit the Indian primary market in last one year. The issue is open from November 7-9, 2017 and the price band has been fixed at Rs 275 -Rs 290. The issue size consists of the sale of 299,827,818 equity shares with face value of Rs 10. There will be no fresh issue of shares and issue is totally offer for sale. Issue constitutes 14.92% of post issue paid up capital of the company which remains same at Rs. 2008.97 crore. At upper price band company will be raising Rs 8695 crore and that will value company at Rs 58277 crore. The minimum lot size consists of 50 shares and in multiples thereof. Post allotment, the company will get listed on both BSE and NSE.

Company’s Background and Finance

HDFC SL is the first private life insurance company to register in India and was established in 2000. The company remains the most profitable life insurance company in India based on Value of New Business (VNB) margin. The margin has improved from 18.5% in FY15 to 22% in FY17.  The reason being new business comes from better profitable products such as protection products that constitute 26% of total new business for the first half of FY18 compared to 21.8% in FY17. The company’s relationship with HDFC bank and other partners has also helped the company to build strong distribution channel comprising of bancassurance.  HDFC SL total premium grew at a CAGR of 14.5% in FY15‐17 to Rs 19445.48 crore. This was primarily driven by a CAGR of 12.6%, 43.6% and 7.3% in individual new business premiums, group new business premiums and renewal premiums respectively.  At present, it is the third-largest private sector life insurance company in India with 16.5 % share of total private sector premiums in FY2017. 

AUM of the company increased from Rs 74200 crore at the end of FY16 to Rs 91700 crore at the end of FY17 registering a growth of 23.6%. This increase in primarily attributed to the net premiums from policyholders, investment income from fixed income securities and mark‐to‐market gains on unit‐linked investment portfolio.

In insurance company insurance profits relates to the part of shareholder profits that arises from the core insurance business reflected by the profits in the underlying policyholder segments.  For HDFC SL insurance profit has increased by 10.4% on yearly basis in FY17 to Rs786.3 crore. Insurance profit as a percentage of profit after tax increased from 79.5% in FY15 to 84.7% in FY17. Its profit after tax has increased at CAGR of 6.3% FY15‐17 to Rs886.92 crore at the end of FY17. For the first half of FY18, company has posted a net profit of Rs.554.14 crore on a total income of Rs.592.21 crore.

Valuation and Our View

At the upper end of the price band (Rs 290) company is demanding valuation of 4.7x FY17 price to enterprise value of Rs12470 crore, which we believe is slightly highly valued. Even on other traditional valuation parameters issues seems to be priced at higher side. Annualizing half yearly (H1FY18) earnings and considering fully diluted post issue equity, issue is valued at a P/E of 52.92. Compare this with the peers like ICICI Prudential Life Insurance, which is trading at current PE of 40. Based on NAV of Rs. 22.3 at the end of September 2017, issue is priced at a price to book value of 13 times.

We believe HDFC SL strong fundamentals and growth in profitable new business, balanced product mix, better distribution channel, and healthy return ratios are already priced in the issue price. Therefore, we see very limited listing gains. However, readers with long-term investment horizon can subscribe the issue looking at strong fundamentals and growth.