SBI Life Insurance IPO Review: A step ahead of ICICI Prudential

When SBI Life Insurance IPO opens for subscription next week, it will be the biggest IPO in India in recent years. The INR8,400 crore IPO will be bigger than the ongoing ICICI Lombard offer and will also trump the ICICI Prudential Life Insurance IPO which raised INR6,056.79 crore last year. In terms of size, SBI Life Insurance IPO will be smaller than the INR10,000 crore NSE plans to raise but the latter’s IPO is clearly delayed to 2018. Through SBI Life Insurance IPO review, we try to find out if this big offer is worth your subscription.

SBI Life Insurance IPO Review: No fresh shares, all OFS

Like ICICI Lombard IPO, SBI Life Insurance IPO will not involve sale of new shares and all the shares will be sold by existing shareholders. The company’s shareholding pattern is dominated by promoter State Bank of India (SBI) holding 70.1% equity in the life insurance player. Another promoter BNP Paribas Cardif owns 26% shares in the company. Smaller stakes of nearly 2% each are with Value Line Pte Ltd – an affiliate of KKR Asian Fund LP and MacRitchie Investments Pte Ltd – an indirect wholly owned subsidiary of Temasek Holdings (Private) Limited.

The Offer For Sale (OFS) will be led by SBI which plans to sell 80,000,000 shares while its partner BNP Paribas Cardif aims to offload 40,000,000 shares. The shares will amount to 12% of the life insurance company’s paid-up share capital.

SBI Life Insurance IPO Review: Insurance, through SBI

The company claims to be the largest private life insurer, in terms of New Business Premium with a market share of 20.04% in FY2017. The company has maintained its leadership on this front since FY2010. New Business Premium accounts for nearly half of SBI Life Insurance’s total premium. However, it is placed second to ICICI Prudential in terms of total premium earned with a market share of 17.82% in FY2017 (ICICI Prudential had 18.96% market share in FY2017).

Like other leading players in the insurance domain, SBI Life Insurance has a well-developed multi-channel distribution network that involved 95,177 individual agents as of 31 July 2017. This network plays a key role of being present on the ground and contributes 22.31% of the company’s New Business Premium. As of 31 July 2017, it had 803 branch offices in 29 States and seven Union Territories across the country set up primarily for the agency network.

SBI Life Insurance also gets ample support from its promoter SBI which has a nationwide network of 24,017 branches and 420 million customers following the merger with associate banks. In fact, bancassurance represents the largest distribution network with 53.03% of the total New Business Premium coming from this channel. In addition, the company has forged partnerships with corporate agents, brokers, insurance marketing firms and other intermediaries.

SBI Life Insurance IPO Review: Laughing all the way to the bank

Thanks to the underpenetrated insurance market in India and SBI’s wide reach, SBI Life Insurance didn’t face issues in scaling its operations. In the last four years, it has doubled total premium earned to INR20,852 crore in FY2017. Higher profits have followed, although not at the same rate. Nevertheless, the company posted a profit after tax of INR954.7 crore in FY2017, implying a net margin of 4.6%. The company has a certain edge over its competitors on several parameters. At 9.21%, its operating expense ratio is the lowest among top five private insurance players while agent productivity is the highest.

SBI Life Insurance IPO Review: All good, should you invest?

Like ICICI Lombard, we don’t find anything wrong with SBI Life’s business. The company is a leader in its trade and that’s for everyone to see. The life insurance industry’s outlook is also quite positive as the INR4.2 trillion (on total premium basis) industry lags its counterparts in other markets. This includes Asian markets like Thailand, Singapore and South Korea where insurance as a percentage of GDP stood at 3.7%, 5.5%, and 7.4%, respectively in 2016. In contrast, India’s life insurance penetration was just 2.7% in 2016. With increasing awareness about insurance products, growing GDP, and rising healthcare costs, it is difficult to imagining the industry not continuing its growth momentum seen in the last decade.

As a leading player, SBI Life Insurance is favorably placed to benefit from this growth. It is in a commanding position right now and all it has to do is to cruise along as insurance is a long-term business and the results of compounding nature come to the fore after several years. One of the biggest reasons behind Warren Buffett’s success is the access to insurance floats through Berkshire Hathaway’s shareholding in insurance players.

Read Also: ICICI Lombard IPO Recommendations: Subscribe, long term, caution

Nevertheless, considerations are (and should be) different for retail investors. Valuations need to be supportive for a successful listing which is what IPO investors are interested in. While all is fine with the company, valuations appear very high. In the year ended 31 March 2017, it had an Earnings Per Share (EPS) of INR9.55 which mean the IPO price band values the company in the Price/Earnings (P/E) range of 71.7 – 73.3. This is higher than the nearly 48 times ICICI Lombard is asking for.

True, ICICI Lombard is a general insurance player and its valuation is not directly comparable to that of a life insurance player. ICICI Prudential is the only listed life insurance player in the country and that trades at a much lower P/E ratio of 36, despite having much better Return on Net Worth  (RONW) of 28.67% in comparison to SBI Life’s 18.56%.

SBI Life’s Net Asset Value (NAV) stood at INR55.52 per share as of 31 March 2017, which pegs the Price/Book Value (P/BV) ratio at 11.9. This is much higher than the corresponding multiple of 9.5 for its listed peer.

Overall, there is a high probability of growth for SBI Life Insurance in the long run but it is unlikely that the market will keep moving up from here and investors wouldn’t get better entry points. SBI Life Insurance IPO Review tells us that the offer is priced higher than its listed peer and leaves little on the table for IPO investors. Nevertheless, do check out the IPO discussion and grey market pages to see how our readers feel about the IPO.