Will HDFC Stan­dard Life buck list­less­ness in in­sur­ance stocks?

Mint Asia ST - - Mark To Market -

In­sur­ance

stocks, both life and non-life, haven’t had a great run ever since in­sur­ers be­gan to list them­selves on the bourses. Of the four in­sur­ers listed, only one has made sig­nif­i­cant gains and that too ow­ing to its first-mover ad­van­tage.

Sam­ple this: SBI Life In­sur­ance Co. Ltd and rein­surer Gen­eral In­sur­ance Cor­po­ra­tion of In­dia (GIC Re) are trad­ing at 8% dis­count to their is­sue price even though broad mar­ket in­dices con­tinue to rise. ICICI Lom­bard Gen­eral In­sur­ance Co. Ltd is trad­ing at a mere 3% gain from its is­sue price. Only ICICI Pru­den­tial Life In­sur­ance Co. Ltd, which listed a year ago, armed with the first-mover ad­van­tage, is trad­ing 18% higher than its is­sue price. But it too had the mis­for­tune to slip 10% within 40 days of list­ing at that time.

An­a­lysts say that part of the un­der­per­for­mance of in­sur­ance stocks is ow­ing to steep val- ua­tions of their ini­tial pub­lic of­fer­ings (IPOS). Most bro­ker­age firms had ad­vised in­vestors to sub­scribe to the IPOS. While some re­ports had al­luded to rich val­u­a­tion, these were jus­ti­fied given the long-term growth story of the in­sur­ance sec­tor.

In­deed, in­sur­ance is a long-term bet and even a one-year per­for­mance of the stock is no in­di­ca­tion of the un­der­ly­ing strength or weak­ness of the com­pany. The sheer un­der­pen­e­tra­tion of in­sur­ance poli­cies in the coun­try shows the rev­enue po­ten­tial to in­sur­ance com­pa­nies.

But be that as it may, in­sur­ance as a prod­uct claimed only 2.9% of the fi­nan­cial sav­ings of house­holds in fis­cal year 2017 (FY17). De­mon­e­ti­za­tion has given a lift to the money flow into the sec­tor but that is true of ev­ery fi­nan­cial prod­uct.

In this back­ground, HDFC Stan­dard Life In­sur­ance Co. Ltd will launch its IPO through which the pro­mot­ers look to raise Rs8,695 crore by sell­ing 299 mil­lion shares to the pub­lic. The IPO is priced at Rs275-290, valu­ing the com­pany at Rs58,000 crore at the up­per end of the price band.

That is a steep 29% rise in val­u­a­tion from a year back when pro­mot­ers were talk­ing of a multi-struc­tured merger deal with Max Life In­sur­ance Co. Ltd.

The deal had put the val­u­a­tion at 4.5 times HDFC Stan­dard Life’s es­ti­mated em­bed­ded value of FY16 at that time. But the in­surer’s em­bed­ded value, which is a gauge of fu­ture prof­itabil­ity, has risen 21% to Rs12,390 crore for FY17 and fur­ther to Rs14,010 crore in the first half of FY18.

The IPO val­ues HDFC Stan­dard Life at 4.2 times its em­bed­ded value as of Septem­berend. This com­pares with ICICI Pru­den­tial Life’s mul­ti­ple of 3.3 times its em­bed­ded value for the same pe­riod. SBI Life is trad­ing at a mul­ti­ple of 3.6 times.

The word on HDFC Stan­dard Life’s is­sue is also the same as peers: long-term po­ten­tial jus­ti­fies rich val­u­a­tion. It would be in­ter­est­ing to see whether the stock fol­lows its peers’ track-record.

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