A finer reading of HDFC Life’s draft red herring prospectus could prompt investors to question if the mega-merger of HDFC Life and Max Life is truly a missed opportunity, particularly for HDFC Life. That may seem justified looking at the way the insurer's financials stack up against ICICI Prudential Life (I-Pru Life) and SBI Life, which are ahead in terms of income and net profit. HDFC Life’s market share has receded from 7.6 per cent in FY16 to 6.9 per cent as of July 31, 2017. The mega-merger, on the contrary, would have easily displaced I-Pru Life from its top spot.
The deal was significant for many reasons, including for the industry as it helped investors ascertain the valuations in an otherwise opaque business. For HDFC Life, the deal took the combined entity’s valuation to Rs 67,400 crore based on FY18 estimates. HDFC Life’s valuation also spiralled overnight to Rs 46,500 crore, and it had a rub-off on its parent — HDFC Limited, which witnessed 5-10 per cent increase in its overall valuation. While the HDFC Life-Max Life deal was pegged at 3.5x one-year forward (FY18 estimated) embedded value (EV), a lot has changed in the past year. Based on one-year forward (FY19) estimates, industry valuations now range at 3-3.3x EV, with I-Pru Life commanding 3.3x.
Based on these numbers, HDFC Life’s initial public offering (IPO) could fetch valuations of about Rs 43,600 crore based on its EV of Rs 13,220 crore as of June 30. Even if valuations ascribed during the merger were to be applied, pricing the IPO at a premium to its merger valuations of Rs 46,500 crore may not be easy (while it is yet to declare the pricing, reports suggest HDFC Life’s IPO may be priced at Rs 50,000 crore).
A mail sent to HDFC Life asking for a confirmation on the pricing wasn't answered till the time of going to press.
For one, it needs to factor in the likely competition from SBI Life (No. 2 among private life insurers) which plans to roll out its IPO in FY18. Estimates peg SBI Life’s IPO valuation at Rs 65,000 crore, which is also expensive given market leader I-Pru Life’s valuation of Rs 60,400 crore. Second, with price discovery more or less a given for the industry, a higher pricing may result in a situation similar to that of I-Pru Life’s IPO. Criticism over I-Pru Life’s IPO valuation, which restricted the stock’s post-issue performance till January (for about three months) needs to be remembered.
Also, in the context of being the No. 3 player and losing out on market share, premium valuations may not find favour with all investors, though piggybacking on marque brand such as HDFC should help the IPO sail through.
Just considering these points, investors are perhaps justified feeling let down by the mega break-up between HDFC Life and Max Life. The HDFC group, after all, has been the champion of its businesses, whether banking, housing finance and even asset management. Will life insurance live up to this?