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HDFC Standard Life IPO opens today: Should you subscribe?

The IPO comprises sale of 1,91,246,050 equity shares, amounting to 9.55 per cent stake, by HDFC Ltd and up to 1,08,581,768 scrips, or 5.42 per cent, holding by Standard Life Mauritius. According to merchant banking sources, promoters are expected to get about Rs 7,500 crore from the stake dilution.

BT Online        Last Updated: November 7, 2017  | 11:47 IST
HDFC Standard Life IPO opens today: Should you subscribe?

HDFC Standard Life Insurance Company, a subsidiary of mortgage lender HDFC, opened its Rs 8,700-crore initial public offer price (IPO) today.

The IPO comprises sale of 1,91,246,050 equity shares, amounting to 9.55 per cent stake, by HDFC Ltd and up to 1,08,581,768 scrips, or 5.42 per cent, holding by Standard Life Mauritius. According to merchant banking sources, promoters are expected to get about Rs 7,500 crore from the stake dilution.

The IPO which closes on November 9 can be subscribed at a price band of Rs 275-290 per equity share.

The equity shares offered in the IPO are proposed to be listed on the BSE and the NSE.

HDFC Chairman Deepak Parekh said: "The funds raised will be used by HDFC Ltd for its business purposes as the insurance arm has adequate capital needed for growth."

At present, HDFC owns 61.41 per cent stake in HDFC Standard Life and Standard Life has about 34.86 per cent stake, while the remaining is with employees and PremjiInvest.

HDFC Standard Life was established as a joint venture between HDFC and Standard Life Aberdeen plc (global investment company), initially through its wholly owned subsidiary The Standard Life Assurance Company and now through its wholly owned subsidiary, Standard Life Mauritius. The company has a pan-India presence, comprising 414 branches across India as of September 30, supported by a workforce of 16,544 full-time employees.

The global coordinators and book running lead managers of the IPO are Morgan Stanley India Company, HDFC Bank, Credit Suisse Securities (India), CLSA India and Nomura Financial Advisory and Securities (India). The book running lead managers are Edelweiss Financial Services, Haitong Securities India, IDFC Bank, IIFL Holdings and UBS Securities India.

The insurer's solvency ratio as at March 31, 2015, March 31, 2016, March 31, 2017 and June 30, 2017 was 196.1%, 198.4%, 191.6% and 197.5%, respectively. IRDAI has prescribed a minimum 150% solvency ratio limit.The solvency ratio is derived out of the solvency margin (available solvency margin to required solvency margin) which denotes the amount by which the assets of the insurer exceed its liabilities.

The insurer had a balance sheet with total net worth of Rs 4,150 crore.

The life insurer generated profit after tax of Rs 886.92 crore and delivered a return on equity of 25.6%, return on invested capital of 40.7% and operating return on embedded value of 21.7% during fiscal 2017.

As at June 30, 2017, the firm had total assets under management (AUMs) of Rs 94,750 crore and Indian Embedded Value of  Rs 13,220 crore.

We look at how brokerages have rated the issue.

GEPL Capital

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 price to book value (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," said the research firm in a note.

Motilal Oswal

Bokerage house Motilal Oswal is also upbeat on the prospects of the HDFC Life IPO.

"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," said the brokerage house in a research note.

ICICIdirect.com

ICICIdirect.com finds valuations reasonable on multiple factors. "At the IPO price band of Rs 275-290, the stock is available at P/IEV multiple of 4.2x H1FY18 EV of Rs 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 Rs 58258 crore at the upper price band," said its research note.

Prabhudas Lilladher

Brokerage house Prabhudas Lilladher holds 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

Choice Broking finds valuations aggressive but believes the firm deserves premium over its competitors.

"On the 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 4.2 times as compared to 3.4 times 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.

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