IPO – ICICI Prudential Life

ICICI Prudential Life Insurance, is one of the leading private life insurance companies in India. The company is a joint venture between ICICI Bank and UK-based Prudential. It offers a range of life insurance, health insurance and pension products. ICICI Bank will sell 12.65% stake through this IPO, and aims to raise Rs 6,057 crore at the upper price band.

Key Facts:
– Top four private players command a market share of 65%
– It is the largest private life insurance company in India with a market share of 22%
– The company has 121016 individual agents and over 4500 branches with bank partners
– The company has over Rs. 1.04 lakh crore total assets under management as on Mar 2016
– The gross premium income was Rs. 19164 crores, and net profit was Rs. 1653 crore as on Mar 2016
– 40% of its net profit is distributed as dividend

– Good management

Opportunity Size:
– India is the 10th largest life insurance market in the world
– The life insurance penetration in India is at 2.7% compared to the global average of 3.5%
– India’s life insurance market is expected to increase from current $60 billion to $160 billion by 2025
– The life insurance industry is expected to grow 12-15% for the next 5 years
– The life insurance industry has collected a new premium income of $20.5 billion last year
– In addition to industry growth, there is value migration from LIC to private players
– The life insurance market is split between LIC and private players in the ratio of 73:27

– Any changes in the product mix may have an adverse impact on its business
– Any changes to regulations could have an adverse impact on its business
– The company’s stock picking skills are very important as significant portion of its investment returns come from investments in the equity markets
– The profitability of some of its products is highly sensitive to interest rates
– Natural disasters could increase its liabilities for claims by policyholders
– The company’s unit-linked insurance plan (ULIP) portfolio stand at 83%

– ICICI Bank holds 68% stake while Prudential has 26% in the life insurance firm
– Azim Premji holds 4.01% stake in the company

The embedded value (EV) of the business is Rs 13,939. At the upper price band of Rs 334, the company is valued at Rs 47,880 crore. The company is valued at 3.4 times of EV and the P/E works out to be 28.9x of its FY16 EPS of 11.54.

Detailed Analysis:

1. Is the business simple and understandable?
We think so. Insurance premiums are effectively a free loan. You don’t have to pay any interest, just make sure you don’t pay out too much in claims. These premiums are known as the float and act like a leverage for an investment portfolio.

2. Does the company have a consistent operating history?
Yes. The company is operating in the life insurance business since 2001.

3. Does the business have a sustainable competitive advantage?
We think so. ICICI Prudential Life has a strong brand value and largest branch network.

4. How good is management at allocating capital?
Very good. The return on equity is more than 30% since FY02.

5. What are the risks?
The risks are highlighted above under section ‘Risks’.

6. Does the business operate in a good or bad industry?
Insurance is one of the favorite industries of Buffett. However, we think stock picking and underwriting skills are very important. Perfect example, Buffett and Jain. It is very rare to find this combination.

7. Does the company earn high profit margin?

8. Does the company generate strong free cash flow?
Yes. The company generates lot of free cash.

9. Can you sensibly estimate future earnings for next five years?
We think so. CRISIL estimates new premium collection for private insurers will grow 15% over the next 5 years.

10. What is the reasonable buy price?
This stock is appropriate for investors who have an investment time frame of 5 years. A maximum of 5% of the total stock portfolio can be invested in the stock.

MyValuePicks is not a registered investment advisor or broker. Readers are advised that the material contained herein should be used solely for informational purposes. MyValuePicks does not accept responsibility for consequences of financial decisions taken by users on the basis of information provided herein. The aim is to provide a reasonably accurate picture of financial and related opportunities based on information available with us.


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