IPO Note | Financials
Nov 6, 2017
HDFC Standard Life Insurance Company Ltd
SUBSCRIBE
sue Open: Nov 7, 2017
Is
Issue Close: Nov 9, 2017
HDFC Standard Life Insurance Co Ltd (HDFC Life) started as a JV between HDFC
Ltd, India’s largest Housing Finance Company and Standard Life Aberdeen Plc.
HDFC Life is the country's third-largest private sector life insurance company with
Issue Details
16.5% share of total private sector premiums in FY2017. Based on the new
Face Value: `10
business premium (NBP), it ranked second with a market share of 17.2%. It had
robust NBP margin of 22% for FY2017 vis-à-vis 10-19% of peers.
Present Eq. Paid up Capital: `2,005cr
Trusted brand name and diversified distribution network major catalysts: HDFC
Offer for Sale: **29.98cr Shares
Life has pan India presence with 414 branches. Its bancassurance partners grew
Fresh issue: --
from 31 in FY2015 to 125 as on 2QFY2018 and top 15 bancassurance partners
had over 11,200 branches across India as on 2QFY2018. NBP has been growing
Post Eq. Paid up Capital: `2,005cr
at healthy CAGR of 17.8% over FY2013-17 (SBI Life’s & ICICI Pru’s NPB grew at
9.2 & 9.1% respectively over same period). Market share of HDFC Life in NBP has
Issue size (amount): *`8,245cr -**8,695cr
improved by 547bps to 17.2% over FY2012-17 (PVT insurer).
Healthy financials & highest VNB margin - a positive: Over FY2015-17, overall
Price Band: `275 - `290
total premium grew at CAGR of 14.5% to ₹19,445cr. It has reported healthy ROE
Lot Size: 50 shares and in multiple
of 23% and Operating Return on Embedded Value of 21.7% for FY2017.
thereafter
Moreover, it has also improved VNB (Value of New Business) margin by 350bps
Post-issue implied mkt. cap: *`55,247cr -
**`58,260cr
to 22% over FY2015-17, which is highest in the industry (ICICI Pru -10%, SBI Life
15.4%). We believe, owing to healthy VNB margin has kept the company self-
Promoters holding Pre-Issue: 100%
sustained, and hence, it would not require diluting capital very often.
Promoters holding Post-Issue: 85%
Balanced business mix makes HDFC Life’s business more predictable: HDFC Life
*Calculated on lower price band
has a well balanced portfolio (ULIP - 35.2%, Non-participating - 50.4% and
Participating - 14.3%) on NBP basis for FY2017 (ULIP contribution for SBI life and
** Calculated on upper price band
ICICI Pru is 50.5% and 79.1% respectively). Experienced management has
Book Building
categorically developed this mix, which will help to reduce volatility in business
QIBs
50% of issue
and impact on the embedded value (EV) and VNB.
Outlook & Valuation: At the upper band of `290 the issue is valued at 4.2x of
Non-Institutional
15% of issue
2QFY2018 embedded value (EV) of `14,011cr, bit higher than close listed player
Retail
35% of issue
SBI Life and ICICI Pru which is trading at 3.6x and 3.3x of 2QFY2018 EV
respectively. However, we believe slight premium is justifiable, considering,
consistent growth across premium categories, improving dividend payout over last
Post Issue Shareholding Pattern
4 years, strong parentage, trusted brand name, highest VNB margin (22% for
Promoters
85%
FY2017) and well balanced business mix. Based on the above positive factors we
Others
15%
assign SUBSCRIBE rating to the issue.
Key Financials
Y/E March (` cr)
FY13
FY14
FY15
FY16
FY17
Premium Income
11,446
11,976
14,762
16,179
19,275
% chg
5
23
10
19
PAT
447
725
786
817
887
% chg
62
8
4
9
AUM
67,047
74,247
91,742
Embedded Value
8,888
10,233
12,471
ROE
21
34
31
26
23
PE
130
80
74
71
66
Jaikishan J Parmar
P/BV
27
27
23
19
15
+022 39357600, Extn: 6810
P/EV
6.6
5.7
4.7
[email protected]
Source: RHP, Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at upper end of the price band
Please refer to important disclosures at the end of this report
1
HDFC Standard Life Insurance Company Ltd | IPO Note
Company background
HDFC Life was established in the year 2000 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, initially through wholly owned
subsidiary The Standard Life Assurance Company and now through wholly owned
subsidiary Standard Life Mauritius. HDFC held 61.21% stake and Standard Life
Mauritius 34.75% as on the date of the Red Herring Prospectus.
The total net worth was `4460cr and the solvency ratio of 200.5% end September
2017 was above the regulatory minimum requirement of 150%. Total assets under
management (AUM) were `99,530cr and Indian embedded value `14,010cr as
on 2QFY2018.
The bancassurance partners include banks, non-banking financial companies,
micro-finance institutions and small finance banks in India. The number of major
bancassurance partners stood at
125 as on 2QFY2018. The top
15
bancassurance partners had over 11,200 branches across India. There were
66,372 individual agents as on 2QFY2018, comprising 6.8% of all private agents
in the Indian life insurance industry.
The pan-India presence comprises 414 branches and spokes across India,
supported by a dedicated workforce of 16,544 full-time employees.
A wholly-owned subsidiary, HDFC Pension, was set up in 2012 to operate the
pension fund business under the National Pension System (NPS). HDFC Pension
had approximately `1162.98cr of AUM from customers enrolled under the NPS as
on 2QFY2018. HDFC Pension is the second-largest private pension fund
management company in India by AUM and subscribers in FY2017.
Exhibit 1: Contribution of distribution channels to total NBP
FY12
FY13
FY14
FY15
FY16
FY17
Bancassurance
55%
47%
50%
54%
51%
54%
Individual agents
12%
10%
10%
8%
8%
6%
Direct
28%
39%
37%
37%
40%
38%
Brokers and others
4%
4%
3%
2%
2%
2%
Total
100%
100%
100%
100%
100%
100%
Source: RHP
Nov 6, 2017
2
HDFC Standard Life Insurance Company Ltd | IPO Note
Issue details
The company is raising `8,245-`8,695cr through a offer for sale of equity shares
in the price band of `275-290. The promoters, HDFC Ltd and Standard Life will
dilute 9.52% and 5.4% respectively in their joint venture HDFC Life. Currently,
HDFC owns 61.21% in the joint venture, which will come down to 51.69%, while
Standard Life's 34.75% shareholding will come down to 29.35% post the IPO.
The offer for sale would constitute 19.82% of the post-issue paid-up equity share
capital of the HDFC Life.
As much as 0.11% of the issue is reserved for eligible HDFC Life employees,
0.04% for eligible HDFC employees and 1.49% for HDFC shareholders.
Exhibit 2: Pre and Post-IPO shareholding pattern
Particular
Pre-Issue
Post-Issue
No. of shares
%
No. of shares
%
Promoter group
2,00,89,73,222
100
1,70,91,45,404
85
Other
29,98,27,818
15
Total
2,00,89,73,222
100
2,00,89,73,222
100
Source: RHP, Angel Research; Note: Calculated on upper price band
Objects of the offer
To achieve benefits of listing equity shares on stock exchanges and to carry out
the offer for sale.
Listing of equity shares will enhance HDFC Life’s brand name and provide
liquidity to existing shareholders. The listing will also provide a public market
for the equity shares in India.
Key Management Personnel
Mr. Amitabh Chaudhry is the Managing Director and Chief Executive Officer of the
Company and he has been with the Company since January 18, 2010. Mr.
Chaudhry holds a bachelor’s degree in engineering (electronics and electrical
branch) from Birla Institute of Technology and Science, Pilani and post graduate
diploma in management from Indian Institute of Management, Ahmedabad. He
has also been associated with CLSA (formerly Credit Lyonnais Securities, Asia).
Ms. Vibha Padalkar is an Executive Director and Chief Financial Officer of the
Company and she has been with the Company since August 4, 2008. Ms.
Padalkar is qualified as member of the Institute of Chartered Accountants of
England and Wales in 1992. She is also a member of the Institute of Chartered
Accountants of India. Prior to her appointment with the Company, she has worked
in varied sectors such as Business Process Outsourcing (WNS Global Services),
FMCG (Colgate Palmolive (India) Limited) and Big 4 audit firms (Lovelock & Lewes
(part of PricewaterhouseCoopers).
Nov 6, 2017
3
HDFC Standard Life Insurance Company Ltd | IPO Note
Investment Rationale
Life insurance industry is well poised for long term growth
The size of Indian life insurance industry stood `4.2tn on a total premium basis in
FY2017. The total premium grew at 17% CAGR over FY2001-17. In terms of total
premium, the Indian life insurance industry is the 10th largest market in the world
and the fifth largest in Asia based on Swiss Re, sigma No 3/2017 report
The penetration of life insurance in India remains low at 2.7% of GDP as of 2016,
compared to 3.7% in Thailand, 7.4% in South Korea and 5.5% in Singapore in
2016. Insurance density at USD 47 in 2016 also remains low, compared with
other developed and emerging countries.
We expect healthy growth for the industry going ahead owing to 1) Low
penetration of insurance in India, 2) Focus on financial inclusion, 3) Increasing
insurable population, 4) significant protection gap, 5) Rise in healthcare spending.
As per Swiss Re Institute sigma No 3/2017 report, the protection gap for India
stood at $8.5 trillion as of FY2017, which was much higher compared to its Asian
counterparts. The protection margin (measured as ratio between protection gap
and protection needs, as per Swiss Re Institute) for India at 92% was highest
among all the countries in Asia Pacific, as per the report. This means that for $100
of insurance protection requirement, only $8 was actually insured as of FY2014.
This indicates the absence of inadequacy of pure protection coverage (term
insurance) for a large part of the population.
Exhibit 3: Premium as % of GDP - 2016
Exhibit 4: Protection margin across key Asian countries (%)
14
100
92
88
11.5
90
85
12
78
79
80
10
70
7.4
7.2
8
56
56
60
5.5
6
50
3.7
3
40
2.7
4
2.3
1.6
30
2
20
0
10
0
India
China South Korea Thailand Indonesia
Japan
Singapore
Source: RHP
Source: RHP,FY14
Nov 6, 2017
4
HDFC Standard Life Insurance Company Ltd | IPO Note
Trusted brand name and diversified distribution network major catalysts: HDFC life
has pan India presence with 414 branches. Bancassurance remained most
significant distribution channel, generating 50.4%, 53.5%, 50.7% and 54.1% of
total new business premiums for FY2015, FY2016, FY2017 and 1QFY2018,
respectively. HDFC Life has longstanding successful relationships with its
bancassurance partners through corporate agency or master policyholder
arrangements. The oldest bancassurance partner relationship was established in
2002. Its bancassurance partners grew from 31 in FY2015 to 125 as on
2QFY2018 and top 15 bancassurance partners had over 11,200 branches across
India as on 2QFY2018. NBP has been growing at healthy CAGR of 17.8% over
FY2013-17 (SBI Life’s & ICICI Pru’s NPB grew at 9.2 & 9.1% over same period
respectively). Market share of HDFC Life in NBP has improved by 547bps to 17.2%
over FY2012-17 (PVT Insurer).
HDFC group is known as an investor for clear corporate governance, professional
management and value creation for long term. These all positive/brand aspect of
the HDFC group would help HDFC Life to garner higher market share into new
business premium.
Exhibit 5: Select bancassurance partners
Source: RHP
Nov 6, 2017
5
HDFC Standard Life Insurance Company Ltd | IPO Note
Healthy financials & highest VNB margin - a positive: Over FY2015-17, overall
total premium grew at CAGR of 14.5% to ₹19,445cr. It has reported healthy ROE
of 23% and Operating Return on Embedded Value of 21.7% for FY2017.
Moreover, it has also improved VNB (Value of New Business) margin by 350bps to
22% over FY2015-17, which is highest in the industry (ICICI Pru -10%, SBI Life
15.4%). We believe, owing to healthy VNB margin has kept the company self-
sustained, and hence, it would not require diluting capital very often.
Exhibit 6: FY2017 VNB margin
Exhibit 7: Return Ratios - HDFC Life
HDFC
FY15
FY16
FY17
22.0%
life
VNB (` cr)
590
740
920
Max Life
18.8%
VNB margin (%)
18.5
19.9
22
SBI Life
15.4%
ROEV (%)
22.9
20.7
21.7
ROE (%)
31
26
23
ICICI Pru
10.1%
Dividend Payout (%)
21
26
30
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Source: Company, Angel Research
Source: Company, Angel Research
Balanced business mix makes HDFC Life’s business more predictable: HDFC Life
has a well balanced portfolio (ULIP - 35.2%, Non-participating - 50.4% and
Participating - 14.3%) on NBP basis for FY2017 (ULIP contribution for SBI life and
ICICI Pru is 50.5% and 79.1% respectively). Experienced management has
categorically developed this mix, which will help to reduce volatility in business and
impact on the embedded value (EV) and VNB.
Exhibit 8: Product Mix - New Business Premium (FY2017) (%)
HDFC Life
ICICI Pru
SBI Life
Linked
35.2
79.1
50.5
Non-Linked
Participating
14.3
7.9
10.8
Non - Participating
50.4
13.0
38.7
Source:
Nov 6, 2017
6
HDFC Standard Life Insurance Company Ltd | IPO Note
Outlook & Valuation: At the upper band of `290 the issue is valued at 4.2x of
2QFY2018 embedded value (EV) of `14,011cr, bit higher than close listed player
SBI Life and ICICI Pru which is trading at 3.6x and 3.3x of 2QFY2018 EV
respectively. However, we believe slight premium is justifiable, considering,
consistent growth across premium categories, improving dividend payout over last
4 years, strong parentage, trusted brand name, highest VNB margin (22% for
FY2017) and well balanced business mix. Based on the above positive factors we
assign SUBSCRIBE rating to the issue.
Exhibit 9: Relative Comparison
HDFC Life
SBI Life
ICICI Pru
Total Premium
19,460
21,020
22,350
APE
4,188
6,727
6,625
NBP (Cr)
8,700
10,150
7,860
Persistency
13 months
81
81
86
61 months
57
67
56
NBP 5 yr CAGR
18
9
9
ROEV
21
23
17
VNB Margin %)
22
15
10
P/EV
4.2
3.6
3.3
Source: RHP, Company, EV-Embedded Value, Valuation as on 3/11/17
Key risks
Any termination of or adverse change in bancassurance arrangements
In FY2015, FY2016 and FY2017, the bancassurance channel contributed 50.4%,
53.5%, 50.7%, respectively, to New Business Premium from individual products. If
there is any adverse change in this channel, it may impact the profitability of the
company.
Abrupt change in interest rates
The profitability of certain insurance products and return on investment are
particularly sensitive to interest rate fluctuations. As of Q2FY18, 58.2% of the
company’s investments were in debt securities. Changes in prevailing interest rates
could reduce the investment returns and spread and thus materially and adversely
affect the business and investment returns, financial condition and results of
operations
Nov 6, 2017
7
HDFC Standard Life Insurance Company Ltd | IPO Note
Income Statement
Y/E March (` cr)
FY13
FY14
FY15
FY16
FY17
Premiums earned - Net
11,446
11,976 14,762 16,179
19,275
% chg
5
23
10
19
Income from Investments
2,543
5,073 12,249
1,791
11,141
Other Income
28
241
79
97
139
Total Income (A)
14,016
17,291 27,091 18,066
30,554
Total Expenditure (B)
2,042
2,108
2,382
2,937
3,552
% chg
3
13
23
21
Commission
647
514
623
702
792
% chg
(21)
21
13
13
Operating Exp - Insurance
1,216
1,281
1,489
1,872
2,385
Provision for Doubtful Debts
179
313
270
363
374
Liabilities against life policies (C )
11,336
14,753
23,886 14,170
26,055
Benefits Paid (Net)
3,903
4,662
8,162
8,177
9,842
Interim Bonuses Paid
3
5
10
8
15
Terminal Bonuses Paid
16
28
62
57
143
Change in valuation of liab in respect of LP*
7,415
10,058
15,653
5,928
16,055
SURPLUS/ (DEFICIT) (D) = (A) - (B) - (C)
638
430
822
960
948
% chg
(33)
91
17
(1)
APPROPRIATIONS
Transfer to Shareholders' Account
390
765
671
718
786
Transfer to Other Reserves
-
-
-
-
-
Funds for future Appr - Prov for lapsed policy
(30)
(218)
(38)
(49)
-
Balance being Funds for Future Appropriations
218
(118)
190
290
161
Transfer to Balance
60
-
-
-
-
TOTAL (D)
638
430
822
960
948
Shareholder Accounts
390
765
671
718
786
Income from Investment
interest, Dividend & Rent - Gross
48
100
151
166
187
Other Investment Income
23
16
53
5
44
Other Income
-
-
0
11
0
Total Income
461
881
874
900
1,017
% chg
91
(1)
3
13
Operating Expenditure
10
239
70
67
108
Profit / (Loss) Before Tax
451
643
805
833
909
Tax
4
(83)
19
17
22
PAT
447
725
786
817
887
% chg
62
8
4
9
EPS
2.2
3.6
3.9
4.1
4.4
% chg
62
8
4
9
Nov 6, 2017
8
HDFC Standard Life Insurance Company Ltd | IPO Note
Exhibit 10: Balance Sheet
Y/E March (` cr)
FY13
FY14
FY15
FY16
FY17
Source Of Fund
Share capital
1,995
1,995
1,995
1,995
1,998
Reserves
186
168
546
1,108
1,828
Shareholders’ funds
2,181
2,163
2,541
3,103
3,826
Borrowing
-
-
-
-
-
Policyholders fund
Policyholders liabilities
10,077
14,371
19,340
24,454
32,781
Provisions for linked liabilities
27,795
32,736
42,140
42,754
50,806
Funds for discontinued policies
538
1,472
2,780
2,973
2,994
Funds for future appropriation
649
313
464
705
867
Total liabilities
41,240
51,054
67,266
73,990
91,274
Application of Fund
INVESTMENTS:
Shareholders'
856
1,614
2,195
2,554
3,231
Policyholders'
11,215
14,706
19,908
25,863
34,692
Assets held to cover Linked Liabilities
28,333
34,207
44,920
45,727
53,800
LOANS
78
48
126
93
48
FIXED ASSETS
282
290
352
347
353
CURRENT ASSETS:
1,154
1,411
1,807
1,960
2,972
Cash and Bank Balances
464
445
573
727
797
Advances and Other Assets
690
966
1,234
1,233
2,174
CURRENT LIABILITIES
1,493
1,428
2,009
2,513
3,775
PROVISIONS
29
27
33
42
47
NET CURRENT ASSETS (C) = (A - B)
(368)
(45)
(235)
(594)
(850)
Miscellaneous Expenditure
844
235
-
-
-
TOTAL
41,240
51,054
67,266
73,990
91,274
% Growth YoY
24
32
10
23
Nov 6, 2017
9
HDFC Standard Life Insurance Company Ltd | IPO Note
Exhibit 11: Key Ratio
Y/E March (` cr)
FY13
FY14
FY15
FY16
FY17
Per Share Data (`)
EPS
2.2
3.6
3.9
4.1
4.4
BV
11
11
13
15
19
IEV
8,888
10,233
12,471
Valuation Ratio
PE (x)
130
80
74
71
66
P/BV (x)
27
27
23
19
15
P/EV (x)
7
6
5
ROE (%)
21
34
31
26
23
Solvency Ratio (%)
217
194
196
198
192
Opex Ratio (%)
Operation Exp
5.7
4.3
4.2
4.3
4.1
Commission
10.6
10.7
10.1
11.6
12.4
Total Cost
16
15
14
16
16
Persistency Ratio
13
73.3
78.9
80.9
25
64.0
67.5
73.3
37
65.1
60.1
63.9
49
64.2
63.4
58.3
61
39.8
50.0
56.8
Note: Valuation ratios based on pre-issue outstanding shares and at upper end of the price band
Nov 6, 2017
10
HDFC Standard Life Insurance Company Ltd | IPO Note
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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Nov 6, 2017
11