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.)
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.