It’s raining insurance IPOs in the primary market, with HDFC Life being the latest entrant into this league. The country’s third largest private life insurer’s Rs 8,695-crore public issue opened for subscription on Tuesday, after having finalised an allocation of Rs 2,322 crore to a clutch of anchor investors including BlackRock Global Funds, ICICI Prudential, SBI FM Equity India and Government of Singapore. The issue, which will close on November 9, has seen a 5% susbcription so far.
The life insurer drew up plans for the offer-for-sale (OFS), with promoters HDFC and Standard Life diluting 14.92% stake, after its proposed merger with Max Life Insurance fell through in June this year due to regulatory objections.
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Analysts from ICICIDIrect, Angel Broking, Prabhudas Lilladher and IIFL Wealth, among others, have taken a positive stance on HDFC Life’s offer, which has fixed a price band of Rs 275-290 per share, taking the issue size to between Rs 8,245-Rs 8,695 crore. “The stock is available at P/IEV multiple of 4.2x. It reported PAT of Rs 886.9 crore and delivered return on euity of 25.6% in FY17. Factoring the parentage brand of ‘HDFC’, strong corporate governance and better than industry VNB(value of new business) margins along with high dividend payouts, we believe valuations are reasonable. We recommend that investors apply to the issue,” an ICICI Direct report asserted.
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While noting that at the upper band of Rs 290, the issue is valued at 4.2 times of second quarter of 2018 fiscal embedded value (EV) of Rs 14,011 crore - a tad higher than close listed players SBI Life and ICICI Prudential Life, which are trading at 3.6 times and 3.3 times of their second quarter embedded value (EV) respectively, Angel Broking has assigned a ‘subscribe’ rating to the OFS. “We believe the slight premium is justifiable considering consistent growth across premium categories, improving dividend payout over last four years, strong parentage, trusted brand name, highest VNB margin (22% for FY2017) and well-balanced business mix,” it stated.
Among concerns around the company’s business prospects, ICICIDirect lists dependence on certain products and regions. “Significant part of total NBP generated by unit-linked and par products. Major portion of business is generated from relatively few regions,” the note said. While recommending investors to subscribe to the issue, Prabhudas Lilladher identified heavy reliance on HDFC Bank, which accounts for 54% of total premium distribution mix, as one of the key risks. Fluctuation in interest rates is another risk factor that could affect the company’s profitability. “Fixed income securities represent 58.2% of the total AUM. Due to the prescribed limits on the manner of the assets held and thus investments to be made, company will not be able to mitigate market risks,” the Prabhudas Liladher report pointed out.
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