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Prudential ICICI Insurance IPO: Good Stock But Price is Too High

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Today’s the last day for the Prudential ICICI IPO. It’s already subscribed 6 times, which means the last few hours will see a serious oversubscription. But is this IPO worth it?
In my opinion: No. But I think there will be some listing gains, which might be a factor of how oversubscribed it is.

The Problem is in the Price

The company is good. It’s the second largest private insurer in India (after HDFC after the Max merger). It’s also got a whole lot of people insured. There’s no problem with that, and the insurance sector in India will grow (to a certain extent).
But the problem really is that it’s not growing fast enough to justify this price.
The price, at the upper end of 334, is a valuation of over 48,000 cr. for an insurer whose embedded value (EV) is about Rs. 14,000 cr. – the multiple is 3.4.
Similar companies in China have a multiple of 1.8. And in China, these companies are growing faster, are already bigger and they have lower insurance penetration. (Chinese premium to GDP is 2% to India’s 2.5%)
Premium growth on a new premium basis is only growing about 10% a year. Of that  the biggest contributor is linked premium – ULIPs mostly, which contribute about 4300 cr. out of the 5,300 cr. of total new premium they have received. In Jun 2016, the ULIP new premium is actually lower than the Jun 2015 number, which indicates that the slowdown in collection of new premium is probably underway.
(I have never disguised my hatred for ULIPs. They deserve to be thrown in a dustbin.)

Valuation Mismatch

While I would pay high for a business expected to grow like crazy, ICICI Pru behaves more like a company that’s mature. It’s growth levels are around 10%, and while profits seem to be going up, these profits may not be sustainable in the longer term as payouts come down. The P/E looking from an accounting perspective is still around 20 (if you extrapolate June 2016 profits, which you shouldn’t extrapolate because it’s the “dress up” quarter for the IPO).

Money Goes To Parent

All the Rs. 6,000 cr. collected will go to ICICI Bank which is selling shares. This is therefore a better deal for ICICI Bank which gets to sell at a high valuation and take home some real cash.
The ICICI Pru business gets nothing from the IPO. Hopefully some employees will make serious money and will be motivated to grow things further, but other than that the IPO adds very little value to the company itself.

Our View: No

Valuations are rich. It might be a well managed company and a good business, but overall I would not pay these valuations when worldwide valuations are half of this for insurers that are growing at 2x the rate. India deserves a premium, but I don’t think it deserves this much of a premium. Oversubscription may drive up listing gains, but otherwise, I’m not interested.

  • Mahesh says:

    Thanks, nice analysis. But benchmarking only against Chinese insurers to call this expensive isn’t looking at the full picture perhaps?

    • Not sure why. china’s insurers are bigger, and they are growing faster than us. Their EV multiples are lower. It makes no sense to pay a growth premium for an industry that isn’t growing as fast as another country which is similar (and there, Life premiums are less than 2% of GDP, India’s is between 2.5% to 4% already) I think we would be overpaying for this company. Premji paid well.

  • Rakesh says:

    Very good analysis. Crisp and clear.

  • Dhruva Pandey says:

    I agree with you but price should be paid based on return exception of the individual, One point you didn’t mention this company has the ROE of 30% which is fantastic (if i am not wrong best in the industry) 2nd) if you believe (which everyone does in street does) loan book for retail sector going to grow for ICICI bank and in that pie housing loans in india has to grow after a period of lull (i agree house prices are too high but its currently a very under owned segment) people will be forced to take insurance and same can be said for retail car loans.
    3rd) On your China comparison – There is no doubt if India reaches where china is today (may in 10-15 years too optimistic) hell lot of people who can’t dream of getting insured going to get into middle class and going to opt for insurance whereas in china the market is kind of stagnant considering lots of structural problem their economy is dealing with.
    One thing i have learned from reading history – Most of the people get it right in predicting downside of the sector or the company but upside has consistently surprised everyone in a long run. Even bill gates admitted in book during 80-90’s he never thought computers and internet going to get so cheap due to technological advancement in semiconductor industry which turned out to be huge tail wind of the software industry.

    • ROEs are high, I agree, but that’s also because much of their higher fee products allow them to extract profits from past policies, and I dont think they will get similar ROEs going forward.
      Why would people choose insurance just like that? If that was so they would be buying insurance now, not later. and premium growth is stalling. China has a LOWER insruance premium to GDP than India – which means after all that growth China is much lower in comparison, so why will India grow to much higher?
      I don’t think i’m going to claim that I am the perfect predictor of the future – no one can know that. I just think this particular business is expensive at this price. It’s a decent business, but at this price it’s terribly overpaying for not enough growth. I could of course be wrong. If I was always right, life would be very different.