By Geetanjali Kedia

ICICI Prudential Life Insurance is entering the primary market on Monday 19th September 2016, with an offer for sale (OFS) of upto 18.13 crore equity shares of Rs. 10 each, in the price band of Rs. 300 to Rs. 334 per share. Entire OFS is by promoter ICICI Bank, currently holding 67.52% stake, who’s holding will shrink to 54.89% post issue. Representing 12.63% of the post issue paid-up capital, OFS will raise Rs. 5,440 crore and Rs. 6,057 crore at the lower and upper price band respectively and will close on Wednesday 21st September.

The company has announced a wide price band of 11%, unlike the recent trend of pricing issues in a very narrow price band. All recent IPOs such as L&T Technology Services, RBL Bank, Dilip Buildcon, L&T Infotech, Advanced Enzymes, Quess Corp had price bands of about 2%. Does such a wide price band indicate lack of confidence on the part of the management (given the enormous issue size) or the merchant bankers (learnings from Yes Bank’s USD 1 bn QIP fiasco), so as to keep all options open before them?

ICICI Bank’s 67.52% subsidiary, along with foreign JV partner - UK’s Prudential Corp (holding 25.83%), ICICI Prudential Life Insurance is India’s largest private sector life insurer, with assets under management (AUM) of Rs. 1.09 lakh crore. For Q1FY17, company enjoyed 11.2% market share among all insurance companies and 23.3% share among private life insurers in India. It has a strong capital position with solvency ratio of 320.5% (30-6-16), vis-à-vis IRDAI-prescribed control level of 150%.

While premium earned (net of service tax) rose 25% YoY to Rs. 18,999 in FY16, income from investments slipped drastically, to Rs. 1,208 crore in FY16, vis-à-vis FY15’s Rs. 18,739 crore, on account of decrease in investment income of unit-linked portfolio. Thus, FY16 net profit remained static YoY, at Rs. 1,653 crore, versus Rs. 1,640 crore earned in FY15, yielding an EPS of Rs. 11.54. Company has consistently earned RoE of over 30% coupled with low expense ratio. However, its bottomline has remained flat over the years – FY13 Rs. 1,515 crore, FY14 Rs. 1,561 crore, FY15 Rs. 1,640 crore, FY16 Rs. 1,653 crore 

For Q1FY17, although Rs. 3,509 crore was premium earned and income from investments rose to Rs. 5,356 crore, net profit of Rs. 405 crore has been reported, which is roughly one fourth of FY16 net profit. Thus, not much improvement is seen in the bottomline in the current fiscal as well. Q1FY17 EPS of Rs. 2.82 is roughly 25% of FY16 EPS of Rs.11.54, implying that despite topline growth, company’s bottomline has been flat, as higher premium does not necessarily translate into higher profits for insurance company.

As on 30-06-2016, company’s equity stood at Rs. 1,433 crore while net worth was at Rs. 5,743 crore, leading to book value of Rs. 40 per share. At Rs. 334, ICICI Bank is selling shares at PE multiples of 29x for FY16 and 28x for FY17E and PBV of 8.4x as of 30-6-16 and 6.8x for FY17E.

At the lower and upper end of the price band, ICICI Prudential Life will have a market cap of Rs. 43,060 crore and Rs. 47,940 crore, respectively. A popular parameter to value insurance companies is the Embedded Value (EV), which takes into account value of in-force business, which stood at Rs. 13,939 crore (31-3-16) for this company. This translates into a price/ EV multiple of 3.1x and 3.4x, on lower and upper end respectively, on historic basis.

On 31^st December 2015 and 31^st March 2016, in secondary transactions, ICICI Bank had sold 4% and 2% stake in the company to Premji Invest and Temasek respectively, at a price of Rs. 226.34 per share, implying price/ EV multiple of 2.4x (based on EV of Rs. 13,822 crore, as of 31-3-15).

At the upper end of Rs. 334, shares in the current IPO are being issued at a 48% premium to last transaction price, despite profitability remaining stagnant. Even at the lower end of Rs. 300, a premium of 33% in less than 9 months’ time, when both seller (ICICI Bank) and nature of sale (secondary) are the same, is not justified, when earnings have not improved. Valuation multiple has also surged by 45% - price / EV multiple of 2.4x then, to 3.4x now, which is seen quite expensive.

In August 2016, merger of HDFC Life-Max Life was announced to create the largest private life insurer in India, with combined EV of Rs. 15,822 crore and combined AUM of over Rs. 1.1 lakh crore. This transaction, strategic in nature, is estimated to have been undertaken at a price/EV multiple of 3.3x (transaction value not in public domain as both entities are not directly listed). Another unlisted peer, SBI Life, had EV of Rs. 12,999 crore (31-3-16) and based on its estimated valuation of Rs. 25,000 crore, the implied multiple is 1.9x.

Besides higher multiple in a public market offering, that too in the primary market, ICICI Prudential Life’s post over-run new business premium (NBP) margins have been lower than HDFC Life/Max Life and SBI Life, leading to lower return and margins. Its share of protection business (<3% of premiums) is also lower than HDFC Life’s 5-6% of premiums, so a relatively low proportion of premium is related to the protection business, again leading to lower margins. Besides, ICICI has the highest proportion of revenue coming from unit-linked insurance plans (ULIPs), accounting for 82% of new business premium. Having high mix of equity (50%+), ULIPs, as a product, are more cyclical in terms of growth/ persistency.

Despite strong brand and pedigree, the IPO seems to be fully priced, leaving little-to-no money on the table for prospective investors. Moreover, flat bottomline growth, 48% premium to last concluded transaction less than 9 months ago coupled with risks to margins from high exposure to ULIPS and lower proportion of protection business remain.

Citing expensive valuations, one can skip this maiden life insurance IPO in the history of Indian stock markets!  

Disclosure: No Interest