HDFC Standard Life IPO opens today for subscription and following poor performances of previous life insurance IPOs, investors are cautious. Retail investors’ wariness towards aggressively priced IPOs was clearly visible in the way the public offer of New India Assurance was given cold shoulders. Nevertheless, it appears analysts and brokerage houses have a positive view in their HDFC Life IPO recommendations. Here is a quick look at major brokerage house views.
GEPL Capital has a positive view on the IPO. “HDFC Standard Life Insurance Company Ltd (HDFC Life) stands to gain from operating leverage. At a P/BV of 15.1xs of FY17 book value we believe that HDFC Life gives a higher return on equity than its peers through its value added business model. We assign a Subscribe rating to the IPO,” noted the research firm in its IPO note.
Analysts at Motilal Oswal are also upbeat on the prospects and have added to positive HDFC Life IPO recommendations. “We are positive on HDFC Life for long term as life Insurance sector in India provide huge opportunities for growth. HDFC Life has delivered Premium Income / PAT growth of 14%/19% in FY13-17. Further the company has delivered strong ROEs in excess of 21% consistently for last 5 years. At upper price band, the issue is priced at P/BV of 15.2x and P/EV of 4.1x FY17 post issue. While the valuation looks higher compared to other listed financial companies (like NBFCs, Insurance and Private banks), we believe premium valuations are justified due to 1) Huge potentials for growth as Insurance in India is highly underpenetrated, 2) Strong financial performance with consistent and profitable growth, 3) Focus on customer centricity enabling growth across business cycles, 3) Consistently growing multi-channel distribution footprint and 4) Consistent and Strong ROEs. Hence we recommend SUBSCRIBE for long term investment,” noted the brokerage house’s research note.
Way2Wealth finds HDFC Life well-suited to benefit from the expanding life insurance market. “HSLIC was one of the most profitable life insurers, based on Value of New Business Margin, among the top five private life insurers in India in FY16 and FY17, according to CRISIL. HSLIC has been consistently gaining market share in terms of total new business premium, from 15.8% in FY15 to 17.2% in FY17. With Life Insurance penetration in India at a meagre 2.6% in 2016 as against the global average of 3.5% in 2016 (comparable Asian counterparts of Thailand, Singapore and South Korea have penetration levels of 3.7%, 5.5% and 7.4% respectively), we believe HSLIC is well poised to capture the huge opportunity in the Life Insurance sector in India.”
Although valuation of HDFC life is on higher side compared to its listed peers SBI Life and ICICI Prudential, the brokerage house finds it is justified as the company has outperformed its peers on key operating parameters. “At the price band of `275-290 the issue is priced at ~3.9-4.2x its Sep-17 Embedded Value of `69.7 per share. We believe the premium valuations compared to ICICI Prudential Life Insurance and SBI Life Insurance are justified due to comparatively higher NBP growth, best in class New Business Margin (NBM) of 22%, consistently high return ratios over the years, higher renewal premium growth over five years (FY12-FY17), lower mis-selling, better death-claims settlement ratio and lowest claims repudiation ratio. We advise investors with a long-term investment horizon to SUBSCRIBE to the issue,” said the report.
The view is not very different at HEM Securities which has also placed a subscribe rating on the IPO. “Company is bringing the issue at price band of Rs 275-290 /share. At upper band, co is trading at P/EV multiple of 4.2x which is higher .Although co has strong parentage with strong fundamentals but looking after valuation, we recommend “Subscribe” on issue for long term,” noted HEM Securities in its IPO note.
SPA Securities also finds the prospects of the company positive. “HDFC SL has grown at a CAGR of 17.8% over the last 5 years in terms of NBP (9% for SBI life & ICICI Pru) enjoying 22% VNB margin. NBP in FY17 stood at ~INR 87bn. A strong parentage, highly profitable product mix, multi channel distribution, improved persistency and healthy return ratios (average 3 year ROE of 29.4%) makes the issue attractive from long term perspective. At the upper end of the band at INR 290 HDFC Standard Life trades at 4.7x FY17 P/EV of INR, 124.1bn. We recommend SUBSCRIBE to the issue as a good long term investment,” said the research firm.
Adding further positivity to HDFC Life IPO recommendations is ICICIdirect.com which finds valuations reasonable on multiple factors. “At the IPO price band of | 275-290, the stock is available at P/IEV multiple of 4.2x H1FY18 EV of |14010 crore (post issue) at the upper end of the price band. 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. Post issue market capitalisation is at ~| 58258 crore at the upper price band,” said its research note.
Prabhudas Lilladher is another brokerage house with a positive view on HDFC Life’s public offer and it expects Operating Return on Embedded Value to improve further. “At the upper end of the band at Rs290 HDFC Standard Life trades at 4.7x FY17 P/EV of Rs124.7bn and 2.8x Sep‐19E P/EV which we believe is fairly valued. Growth in profitable new business, balanced product mix, better distribution channel, improved persistency and healthy return ratios makes the issue attractive for long term perspective. We recommend investors to subscribe to the issue,” said analysts Vidhi Shah, R Sreesankar and Pritesh Bumb in their report.
Choice Broking finds valuations aggressive but believes the company deserves premium over its competitors. “On valuation front, HDFCSL is available at a P/IEV of 4.7x (to its FY17 IEV), which is aggressively priced as compared to the peers. Also considering the H1 FY18 IEV, the company is available at a P/IEV of 4.2x as compared to 3.4x of the peers. We are of the opinion that considering the revenue-mix, profitability, higher contribution of new business to the IEV and higher & trusted presence of HDFC brand in the domestic consumers, the premium valuation demanded by the company is justified. Thus considering the above observations, we assign a “SUBSCRIBE” rating for the issue,” said the broking firm.
Clearly, analysts are positive in HDFC Life IPO recommendations and without a doubt, the company’s corporate parentage and the resulting governance standards are among the top-notch. However, grey market movements point to a premium less than 10% which is not a great indication.