HDFC Life IPOThe HDFC Life IPO amounting to Rs. 8,700 crores, comprises an offer for sale (OFS) of 191,246,050 equity shares by HDFC Life and up to 108,581,768 equity shares by Standard Life, the UK based insurer.  HDFC Standard Life Insurance a dominant player in emerging insurance sector in the country, is one of the top three private life insurers in terms of profitability. After the HDFC Life IPO issue, the promoters will collectively control, approximately 81.04% of the outstanding Equity Shares. HDFC Life IPO will be third IPO from HDFC Group. HDFC Life decided to go ahead with the IPO after a merger with Max Life Insurance was rejected by the Insurance Regulatory and Development Authority of India (IRDAI) citing a violation of the Insurance Act.

HDFC Life IPO Details
Issue PeriodTuesday, Nov 7, 2017-Thursday, Nov 9, 2017
Issue Size (No. of Shares)Offer For Sale of up to 299,827,818 Equity shares 
Issue Size ( Rs.)Rs. 8,245 – 8,695 Cr
Reservation: 
HDFC Life Employee Reservation* 2,144,520 Equity Shares
HDFC Ltd Employee Reservation*805,000 Equity Shares
HDFC Ltd Shareholders Reservation*29,982,781 Equity Shares
Price BandRs.275 – 290
Bid Lot50 Equity Shares and multiple thereof
Issue Structure : 
Total Net OfferUp to 26,68,95,517 Equity Shares (Rs.7,340 Cr – 7,740 Cr)
QIB50% of the Net offer (up to 13,34,47,758 Equity Shares ) (Rs.3,670Cr – 3,870Cr)
NIB15% of the Net offer (up to 4,00,34,328 Equity Shares) (Rs.1,101 Cr – 1,161 Cr)
Retail35% of the Net offer (up to 9,34,13,431 Equity Shares) (Rs.2,569~ Cr – 2,709^ Cr)
Appls. for 1x subscription(min. lot)- Retail18,68,269
Appls. 1x subscription(min.lot)Shareholders5,99,656
BRLMsMorgan Stanley, HDFC Bank, Credit Suisse Sec, CLSA India, Nomura Financial,
 Edelweiss Fin, Haitong Sec, IDFC Bank, IIFL Holdings, UBS Sec
RegistrarKarvy Computershare Pvt. Ltd.

About HDFC Standard Life Insurance

  • HDFC Standard Life Insurance was one of the first private life insurance company to register in India and was established as a joint venture between HDFC (one of India’s leading housing finance institutions) and Standard Life Aberdeen plc (one of the world’s largest investment companies).
  • The promoter HDFC is a leading financial service provider in the country offering housing finance, banking, asset management,life and general insurance, venture capital etc. Standard Life is an UK based investment company offering wide range of financial services around the globe<
  • HDFC Standard Life Insurance Company Ltd (HDFC Life) has a broad, diversified product portfolio covering five principal segments across the individual and group categories, namely participating, non-participating protection term, non-participating protection health, other nonparticipating and unit-linked insurance products. As at September 30, 2017, its product portfolio comprised 32 individual and ten group products, as well as eight optional rider benefits. 
  • HDFC Life has over 414 branches and 15,406 full-time employees located across India  and  58,147 individual agents.
  • In Fiscal 2012, HDFC Standard Life Insurance established a wholly-owned subsidiary, HDFC Pension, to operate it pension fund business under the National Pension System. As at March 31, 2017, HDFC Pension had approximately ₹11,629.8 million of AUM from customers enrolled under the National Pension System. HDFC Pension is the second largest private pension fund management company in India in terms of assets under management and subscribers in Fiscal 2016.
  • HDFC Standard Life Insurance established its first international subsidiary in the UAE, HDFC International, to operate its reinsurance business.
Financials:
Figures in Rs. Crore
 HY17-182017201620152014
Revenue-Premiums Earned9,050.9019,274.8016,178.7014,762.4011,976.40
Revenue-Investment Income5,278.2011,140.601,790.5012,249.205,073.00
Profit Before Tax570.9908.9833.3804.5642.5
Profit after Tax554.1886.9816.7785.5725.3
Face Value1010
Share Capital2,005.501,998.401,995.201,994.801,994.80
Reserves (net)2,408.001,795.501,149.40548.4165.4
Net Worth4,463.603,826.303,103.402,541.201,928.00
Fair Value Change Account4932.3-41.2-22.7
RoNW (%)13.4%^25.60%28.90%35.20%44.40%
NAV (Rs. per share)22.319.115.612.79.7
Solvency Ratio200.50%191.60%198.40%196.10%193.90%
EPS  (Rs.per Share)2.84.44.13.93.6
IPO  Price290
PE (FY17)65.91
PE (annulaised HY17-18)51.79
CAGR Revenue-Premiums 3 yrs18.40
CAGR Net Profit 3 Yrs4.45
Market Cap58159.5cr
Embedded value(EV)Fy1712470.5cr
Market Cap/EV4.66
Embedded value(EV)HY17-1814011.4cr
Market Cap/EV(HY17-18)4.15
Objectives of the Issue

To achieve the benefits of listing the Equity Shares on the Stock Exchanges and to carry out the sale of Offered Shares by the Selling Shareholders.

Rationale for Investment:HDFC Life IPO
  • HDFC Standard Life Insurance is  one of the most profitable life insurers, based on Value of New Business (VNB) margin and is among the top five private life insurers in India (measured on total new business premium) in Fiscal 2016 and Fiscal 2017. Besides consistently being among the top three private life insurers in terms of profitability based on VNB margin, HDFC Standard Life Insurance has  also consistently been among the top three private life insurers in terms of market share based on total new business premium between Fiscal 2015 and Fiscal 2017.
  • HDFC Standard Life Insurance has a broad, diversified product portfolio, covering five principal segments across the individual and group categories, namely participating, non-participating protection term, non-participating protection health insurance, other non-participating and unit-linked insurance products. The wide product suite caters to specific needs of customers during each stage of their lives. This  provides HDFC Standard Life Insurance  with the flexibility to operate successfully across business cycles, work with diverse sets of distribution partners and serve a range of consumers from mass  market to high net worth individuals. 
  • HDFC Standard Life Insurance has developed a multi-channel distribution platform over the years. It derives considerab;e strength from its  Our bancassurance distribution channel  which contributed 69.6%, 71.5%, 68.2% and 66.6% of its annualised premium equivalent for Fiscal 2015, Fiscal 2016, Fiscal 2017 and the six months ended September 30, 2017, respectively
  • HDFC Standard Life Insurance market share among private life insurers in India in terms of total new business premium increasing from 15.8% in Fiscal 2015 to 17.2% in Fiscal 2017.
  • HDFC Standard Life Insurance can count on experienced Leadership and HDFC is a Trusted brand with unmatched reputation
  • HDFC Life deploys a Leading digital platform that provides a superior experience for customers and distributors.
  • The company has a strong balance sheet with total net worth of Rs.4,460 crore and a solvency ratio of 200.5% as at September 30, 2017. This  is well above the minimum 150% solvency ratio required under IRDAI regulations.
  • The Healthcare market offers significant opportunities for insurance sector as more health insurance products launched amidst rising  healthcare costs. Healthcare insurance premium have exhibited a healthy growth in last few years 
  • HDFC Standard Life Insurance Health insurance trend
Risks & Concerns: HDFC Life IPO
  •  The insurance regulatory and policy environment in the country  continues to evolve  and  IRDAI from time brings out changes in regulation and compliance requirements which could have a material adverse effect on company’s  business.
  • Interest rate fluctuations can materially and adversely affect the  profitability.
    as the fixed income securities portfolio represented 58.2% of total AUM of the company.
  • Aggregate foreign investment from all sources in an insurance company, is permitted up to 49% only.
  • Tepid listing of recent IPOs of insurance companies may weigh on HDFC LIfe IPO as well. 
Comparison with Peers:
Figures in  Rs. Billion except where (%)
  ICICI Pru LifeHDFC LifeSBI LifeMax LifeBajaj Allianz
Business performance (FY17)New business premium (FY17)78.687101.536.832.9
 5-year CAGR (till FY17)9.1%17.8%9.20%14%3.90%
 Individual-New business premium (FY17)69.84264.733.110.7
 5-year CAGR (till FY17)18%7.70%14.10%14.10%-10%
 Group-New business premium (FY17)8.94536.83.622.2
 5-year CAGR (till FY17)-15.3372.91319.5
 Individual WRP (FY17)64.136.459.426.410.1
 5-year CAGR (till FY17)17.90%6%23%11.90%-5.10%
Renewal premiums (FY17)Linked + non-linked144.9107.5108.771.128.9
 5-year CAGR (till FY17)8.60%11%10.50%9.60%-9.50%
 
Total Premium (FY17) 223.5194.6210.2107.861.8
 5-year CAGR (till FY17)9.80%13.80%9.90%11%-3.70%
Costs (FY17)Commission ratio3.40%4.10%3.70%8.70%2.40%
 Expense ratio10.70%12.60%8%15.70%18%
EV (FY17) 161.8123.9165.467.4112.6
NBM (FY17)(%) 10.121.615.418.8-4.30%
Persistency (FY17)13th month(%)85.780.981.180.468.2
 25th month(%)73.973.373.970.451.1
 37th month(%)66.863.967.459.743.9
 49th month(%)59.358.362.554.938.2
 61st month(%)56.256.867.25331.6
ProfitabilityROE (Average FY15-17)31.20%29.420.123.612.2
 ROIC (Average FY15-17)34.338.487.925.271.4
Market share (k) (FY17)      
 Industry level (%)126.811.251.9
 Private sector (%)22.312.720.79.23.5
Product mix (NBP, FY17)      
 Linked (%)79.135.250.524.441.7
 Non-linked (%)20.964.849.575.658.3
No of productsIndividual (%)1930291823
 Group (%)91010511
AUM (FY17)Total1,229917977444493
5-year CAGR 11.923.31620.84.6
Channel mix New Business Premium (Individual) (FY17)      
       
 Individual agents (%)23.50%15.50%34.10%25.00%84.70%
 Corporate Agents-Banks(%)57.10%61.10%64.70%61.80%3.80%
 Corporate Agents-Others(%)3.60%4.30%0.40%3.20%0.60%
 Brokers(%)2.20%4.20%0.00%0.30%1.70%
 Direct Business(%)13.60%14.80%0.80%9.70%9.20%
       
Claim ratio      
Claims settlement(%) 97.20%99.20%98.00%98.30%99.20%
Claim Repudiation(%) 2.40%0.70%1.60%1.50%0.80%
Average turnaround time (Days)      
  3.05NANANANA
Assessment
  • Life premiums in the emerging markets grew 17% in 2016 versus 12% in 2015, well above the overall growth of 2.5%.
  • After regulatory changes in 2011, private sector insurance companies have gained higher market share than LIC, for the first time in FY16.
  • HDFC Standard Life Insurance is well positioned to tap the  synergies accruing from banking operations of their parent group to reach out to customers, minimise cost and improve efficiency.
  • Demographic advantage in terms of largest number of Young people in India is favorable to Life insurance companies and to HDFC Life IPO.
  • HDFC Standard Life Insurance is the most profitable life insurer based on value  of  new  business  (VNB)  with  VNB  margin  at  22%  in FY17. 
  • HDFC Standard Life Insurance enjoys a marketshare of 6.8% in Fy17 at the industry level and 12.7%  among the private players.
  • HDFC Standard Life Insurance also has the most balanced product mix  with ULIP constituting only 35% of  the  total  NB (New Business) basis.  HDFC Standard Life Insurance  has  a  high  share  of  protection  business  (which is considered as the most profitable business segment in insurance business) at 26.4% of total NB(New Business)  in H1FY18 and has  focus to increase it further.
  • HDFC Standard Life Insurance subsidiaries  in the  pension and reinsurance business are likely to help it diversify its sources of revenue and profitability in future.
  • Despite recent poor show on  listing by some insurance companies, HDFC LIfe IPO stands apart due to its strong parentage and  trust of customers associated with the brand ‘HDFC’.
  • HDFC Standard Life Insurance is positioned as a leading life insurer in one of the fastest growing economies in the world with a growing and under-penetrated life insurance market.
  • Strong parentage and a trusted brand of “HDFC” enhances its appeal to consumers and investors. The group is well recognized for its focus in delivering consistent and profitable growth, customer-centric product development and sales approach and has demonstrated an ability to deliver value to its customers, shareholders and distribution partners.
  • I intend to apply fully in the HDFC Life IPO both in the retail category and in the Shareholders actegory. For shareholders category in HDFC Life IPO the cut off date is date of filing of Draft Red Herring Prospectus (DRHP) which is 18th Aug 2017.
  • A key event though unrelated but  may impact the response to HDFC IPO is listing of Reliance Nippon Life AMC on 6/1/17 (Monday). Any erosion in current premium of Rs, 40-45 may impact response to HDFC LIfe IPO .
  • While my expectations are in favor of small listing gain, this is not the reason for applying in HDFC Life IPO. I intend not to sell most of the  allotted shares in HDFC Life IPO in the short run and consider it fit for a quite long haul with the understanding that return will not be phenomenal but gradual at least in the short run.

Standard disclaimer: I am not a SEBI registered analyst and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.