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 valuations 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 under-penetration 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). Demonetisation 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 September-end. 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.