I-Pru Life: From dud IPO to star performer

After trading at a discount on listing, stock has gained 27%

Not much was going the way of ICICI Prudential Life (I-Pru Life), the life insurance arm of ICICI Bank, for a long time. Despite being the most celebrated initial public offering (IPO) of 2016, the stock was trading below its listing price of ~335 for over three months after listing. But 2017 has been better than anticipated for the insurer. With year-to-date gains of over 40 per cent, the I-Pru Life stock has outperformed index gains. Investors who purchased the stock during the IPO would be richer by 27 per cent now. With a market capitalisation of more than ~60,000 crore, I-Pru Life is ahead of Nifty constituents such as Siemens, Bank of Baroda and Tech Mahindra. With this, experts believe IPru Life isn’t too far from charting its way to the CNX Nifty index. Sanjiv Bhasin, executive vice-presidentmarkets & corporate affairs, IIFL, said inclusion in the futures and options (F&O) trading will give the stock the required momentum. “Derivatives-listed stocks enjoy better liquidity and improves the interest on the stock. Therefore as soon as IPru Life enters the F&O list, it is well-placed to enter the Nifty bandwagon,” he said.

Over the past year, net earned premiums increased 20 per cent to ~22,774 crore, while the value of new business has gone up from ~412 crore to ~666 crore in FY17, a 61.7 per cent rise year-on-year (y-o-y). The overall embedded value has also increased by 16 per cent to ~16,184 crore. Analysts at JPMorgan believe much of the growth was led by strong post-demonetisation flows, which helped the business from November 2016 to March 2017 to expand by 42 per cent y-o-y. “The product positioning and distribution strength put it in a sweet spot for the postdemonetisation demand spike. We think this growth will sustain through FY18 and we have raised our FY18 estimate to 25 per cent,” analysts led by Seshadri Sen note. With 84 per cent exposure to unit-linked insurance policy, an equity market-dependent product, I-Pru Life’s improved performance may also be linked to the overall increase in equity market sentiments. Also, a sharp rise in new business additions may result in cost overruns. Operating expenses, which surged by 24 per cent y-o-y in FY17 resulted in flat net profit growth.

The metrics to watch for are I-Pru Life’s ability to expand its new business, particularly on the protection or pure risk cover policies (now at over three per cent of annualised premium equivalent), sustain premium persistency (retaining policyholders) and widen its market share (at 12 per cent) without compromising on these aspects. The asking rate at 3.3x FY18 price-embedded value (P/EV), which looks more benign now than during listing, also supports the investment thesis. Uncertainties on the HDFC Life–Max Life merger would make I-Pru Life the sole listed player in the next 6–8 months, adding comfort to valuations in the near term.