ICICI Pru Life IPO signals jump in valuations

While its valuation stood at Rs 32,500 cr in November 2015, it is now commanding Rs 45,000-50,000 cr with the public offer

ICICI Prudential Life Insurance, which is set to become the first insurance company in the country to come out with a public offer, could benefit from an increase in its valuation. While the private life insurance company’s valuation stood at Rs 32,500 crore in November 2015, it is now commanding Rs 45,000-50,000 crore with the public offer, say experts.

“Valuations have jumped 50 per cent. This is on account of the assets under management (AUM) going up since the last deal, as well as the overall expenses of the company coming down,” said a senior insurance consultant.

On Monday, ICICI Bank informed the stock exchanges that ICICI Prudential Life has filed a draft red-herring prospectus with the Securities and Exchange Board of India. The public offer is for sale of up to 181,341,058 equity shares of ICICI Prudential Life Insurance Company, representing approximately 12.65 per cent of its equity share capital, through an offer for sale by ICICI Bank. The offer includes a proposed reservation of up to 18,134,105 equity shares (10.0 per cent of the offer) for shareholders of ICICI Bank.

In a deal that was announced in November 2015, ICICI Bank sold a six per cent stake in ICICI Prudential Life Insurance to Premji Invest and its affiliates, and Compassvale Investments Pte, a unit of Singapore-based Temasek, for Rs 1,950 crore. This deal had valued the life insurance company at Rs 32,500 crore, making it the highest valued private insurance company in the country.

After that, the new business premiums as well as renewals of the life insurance company surged in FY16. Year-on-year, the expense ratio also came down to 14.5 per cent in FY16 while annualised premium equivalent rose to Rs 5,170 crore in FY16 from Rs 4,744 crore in FY15.

Notably, the recent brokerage reports have assigned a total value of Rs 30,400-32,500 crore to ICICI Prudential Life in ICICI Bank’s sum-of-the-part valuation (combined value of all the businesses/stake in companies the bank owns). If indeed ICICI Prudential Life Insurance Company is able to command valuations of Rs 45,000-50,000 crore, it will imply upsides of 54-64 per cent from what brokerages are valuing it at. In that case, it will prove positive for the existing shareholders of ICICI Bank, as the stock could see some upside.

Max Financial Services, which holds a 68 per cent stake in Max Life Insurance, which has a market capitalisation of Rs 13,600 crore currently, provides some indication of valuations. For the year ending March 2016, Max Life’s net profit stood at Rs 439 crore, or about 27 per cent of ICICI Pru Life's Rs 1,650 crore, while its AUMs at Rs 35,824 crore was about 34.5 per cent that of ICICI Pru Life.

However, investors looking to subscribe to the issue might not derive much value from the issue, say analysts.

Suresh Ganapathy, financial analyst at Macquarie Capital, says: “As of FY16, the Indian Embedded Value (IEV) of ICICI Prudential Life was Rs 13,900 crore, implying a price to enterprise value (EV) multiple of 3.5 times for a business with a new business margin of 8 per cent for FY16. If ICICI Prudential Life gets valued at Rs 50,000 crore, it would imply a per-share value of Rs 349 (for the insurance company), based on the number of shares prior to the offer. Hence, we see very little value left on the table for investors as multiples look very expensive.”

After assuming a 15 per cent holding company discount, there is a nine per cent upside to his valuation of ICICI Prudential Life. Analysts say ICICI Prudential and HDFC Life (after merger with Max Life) could trade at similar valuations after listing.