SBI Life IPO – Stretched Valuation; Euphoria in IPO Space

Issue Date: Sep 20, 2017 – Sep 22, 2017

Face Value: INR 10 per equity share

Issue Type: Book Built Issue IPO

Issue Size: Offer for Sale of 120,000,000 Equity Shares

Issue Size: Rs 8,400.00 Cr

Price Band: Rs 685 – Rs 700 Per Equity Share

Market Lot: 21 Shares approx

Minimum Order Quantity: 21 Shares

Listing at: BSE, NSE

 

About the company

SBI Life Insurance Company Limited (SBI Life) is the largest life insurance company in  India in terms of New Business Premium (NBP) with the highest 20.04% market share. It was incorporated in March 2001 as a joint venture between largest PSU bank SBI(74%) and global insurance company BNP Paribas Cardif (BNPPC) (26%) with equity capital of Rs.125Cr. Initially, the business was operated only through the agency channel with 719 advisors and by end of FY03 bancassurance channel was launched, which has now become an immense network covering rural and urban India. In FY06,SBI Life became the first private life insurance company to achieve profits above the breakeven with Rs.2.03Cr profit. Today, they have pan-India presence through multi-level distribution channels comprising 803 branches with an AUM of Rs.101226Cr.

  • SBI Life, sixteen year old company is the most trusted name in the Indian life insurance industry.
  • They lead with highest New business premium in life insurance segment with 20.04% share growing with CAGR of 35.45% during FY15-17.
  • They are among the top 4 private life insurers having 24.2% CAGR renewal premium growth in FY14-17 and being the most cost efficient with just 11.6% total cost ratio. SBI life’s 61-month persistency stands at 67.2% whereas industry average is below 60% confirming customer satisfaction.
  • Multichannel distribution network is the strength of business comprises the largest bancassurance network with 26,367 branches and the most productive agency workforce of 95,355 individual agents.

MoneyWorks 4me Opinion

SBI Life Insurance ranks higher than any other private life insurer. It leads in new business premium growth, claim settlement ratio and product mix.

SBI Life leverages SBI’s, Punjab Sind Bank’s and South Indian Bank’s branches and individual agents to promote Life insurance. After LIC, SBI Life is the biggest life insurer. Due to scale, the cost of operations is quite Low for SBI life.

We like SBI Life over ICICI Prudential Life due to Stable product mix due to slighlty lower share of ULIPs and more endowment/moneyback share. Number of policies written by SBI life is more than peers but average premium is low due to lower share of ULIPs.

Current growth rates in number of policies is low but due to better product mix of ULIPs, total premium growth looks high. We are of opinion that ULIPs are cyclical in nature and their attractiveness falls when equity markets don’t do well.

We observe that SBI Life has good persistency ratio of >60% in 61st month (meaning 60%+ people do not stop paying premium at the end of 5th year)

Almost all Indian life insurers are engaged in insurance cum investment product mixed with cash back/ endowment/ ULIPs policies due to poor demand for pure term life insurance. Historically, an Indian consumer has had very low debt level and sufficient savings for his family to fall back upon. Probably this is the reason why Term Life insurance never gained popularity across country. Insurance companies in India have tried to penetrate the market by selling a mix of investment and risk product. Agent led push model helped Insurance companies to position themselves as low risk investment pseudo asset class to diversify from FDs, Real Estate and Gold. Most of the policies are sold on the basis of promising large bullet pay-out which is back-loaded – 10 to 15 years down the line or regular small income for long periods. If we go back to compound interest rate tables, we would realize that the returns are lower than 4-6% p.a. on our invested capital at piddly risk cover of 3-4X. So basically, the customer ends up buying an investment option substandard to Fixed Deposits and risk cover which is insignificant for family to fall back upon in case of demise.

Talking about the future, we agree with the management that market is quite underpenetrated and underinsured. If we remove investment cum insurance products, only protection products form very low proportion as % of GDP. We believe with more than 20% population coming in working age over next decade, the growth in insurance product is imminent. We also acknowledge investments in financial assets story due to which insurance companies are likely to benefit.

However, we do not believe that new business premium would rise at 30%+ rate as incremental growth is coming from ULIPs due to high returns given by equity and debt markets. Investors are craving for higher returns due to fall in real estate growth, gold and fixed deposits. Due to volatile nature of debt and equity markets, the acceleration in ULIP growth will subside to some extent. One of the brokerage houses, Credit Suisse, rightly labelled Indian Life Insurers, “AMCs dressed up as insurers.”

In our opinion, Price to Embedded Value is the right metric to value life insurance companies. If we do the reverse calculation of issue price, it factors in growth in excess of 20-25% growth in premium over 5-7 years. We would like to highlight that one shouldn’t apply more than 1.5-2X multiple on Embedded value as cross cyclical ROEs can’t exceed a particular range of 15-18%.

On basis of stretched valuation, we recommend AVOID.

We would like to observe one entire cycle to make better estimates of fair value. We have often seen that a particular sector becomes favorite of the market and new listings take advantage of it to list at premium valuations. We are cautious on entire financial space as it underestimates risk of business model and we believe its not the right time to get aggressive at such peak valuations. Its better if you trim down your Insurnace and NBFC holdings. Click here to know risks in your portfolio for free.

As lot of hands are chasing handful of stocks, IPO issues may experience rapid increase in share price in short term. You may wish to ‘speculate’ with a small capital.

But as an advisor, our duty to inform you what is right and refrain you from risk taking behaviour in this market. We will definitely recommend you select issues which are worth investing. We are equally interested in making money as you are!

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3 Responses to “SBI Life IPO – Stretched Valuation; Euphoria in IPO Space”

  1. Hi Team,

    AS always nicely analysed with all the business insights and bang on conclusion about general euphoria and short term price movement.

    Though would love to see the FAIR VALUE price tag for this IPO too.

    Loved it and shared it within the network of investors…

  2. Nice detailed analysis and dare to say “avoid” to such marquee promoters.

  3. Good guidance.please go on goving your suggestion for incoming ipos too.
    Thanks
    RKMAHESHWARI

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