Stock Market

ICICI Pru to command scarcity premium, good long-term bet: Pros

India’s largest private sector life insurer ICICI Prudential Life Insurance Company Thursday listed on the bourses. The issue price was fixed at the higher end of price band of Rs 300-334 per share.

The issue opened below the level Rs 334.

Sanjeev Jha, India Head of Global Capital Market, Bank of America Merrill Lynch said he is not disappointed with the listing which was slightly lower than the price band and that the house remains positive on the stock and expect healthy returns.

In the recent past there have been lots of successful IPOs but the only thing lacking so far was a flagship, blockbuster largesize IPO – large enough in a global context, which provided large global investors (sovereign funds, pension funds, HNI) to participate and ICICI Pru has provided a wealth creation opportunity for these investors.

So, this is an IPO that has checked all boxes and has been subscribed across all categories.

The insurance industry is at a very nascent stage in India and so ICICI Pru is likely to command a scarcity premium, said Jha.

Even Santosh Singh, Head of Research India, Haitong Securities is not disappointed because the issue was priced at a higher band but assures investors that it is a very good company for those who have a longer time-frame. Retail which has entered the company for listing gains could be disappointed but long-term investors would benefit.

According to him, the right valuation for the company is around 10-12 percent lower than the current prices, so one could buy it at around Rs 300 levels for investors with 6-12 month perspective. However, for investors with a 3-4 year perspective even if they buy at current levels of around Rs 332 would make good returns.

The two key areas to look at would be the embedded value and return ratio. On an embedded value basis the stock is expected to grow at 15-16 percent compared to its peer, which may grow at percent.  

Below is the transcript of Sanjeev Jha’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.

Latha: Are you satisfied? Happy with the kind of response the initial public offering (IPO) has given considering that the listing is just about there?

A: As you are aware, in the Indian markets over the last 12-18 months, the IPO markets have come back very strongly and we have had a string of good issuances which have been well subscribed and have also made money for investors. Perhaps the only thing missing was a flagship blockbuster large size IPO which was not just large in the Indian context, but also in a global context and which provided an opportunity to some of the large investors globally, whether it be sovereign funds, pension money, long-term money to participate in that IPO and of course also create a wealth creation opportunity for retail as well as high networth individual (HNI) investors. And we believe from the results of ICICI Prudential Life Insurance, this is an IPO which has checked all boxes, so very well subscribed across the institutional category, very well subscribed in the HNI category and again, just under USD 1.2 million dollar applications in the retail tranche which frankly is the highest since 2010. So all in all, a very satisfying IPO to work on and something which as I said, is a great opportunity for investors.

Anuj: The growth of the life insurance industry has been in the single digit mark. Nothing has changed, but the valuations of the company have jumped from 2.5 times to 3.5 times even 4X. Do you see that is reasonable?

A: As you are aware, when people look at life insurance companies, one, they look at the macro Indian backdrop in terms of the demographics and in terms of the scale that India provides on the insurance space. And we really believe that we are still at very early stages of that expansion. Second, if you look at the business profile of the company as well, as you are aware, we cannot specifically comment, but if you look at the margin profile that this company has and is expected to have going forward or the value of new business that is expected to go forward very strongly. If you combine all those parameters, we do believe that this valuation is very reasonable and of course, something that creates enough opportunity for wealth creation for both institutional as well as retail investors.

Latha: What kind of growth rate are you expecting for the Indian life insurance industry itself over the next 2-3 years?

A: Frankly, I will not be able to comment on that as you are aware. From a compliance perspective, we will not be able to speak forward numbers. But we also need to keep in mind that there is a scarcity premium that stories like ICICI Prudential Life will always command. Frankly, investors who have had no chance to play a pure play Indian insurance company and this is their first such opportunity. So we obviously, do benefit from that scarcity premium as well as far as the deal is concerned.

Anuj: A lot of interest in India right now in the corporate space – qualified institutional placement (QIP), block deals, mutual funds, a lot of promoters also selling stake. In the last 3-4 months, we have seen Rs 12,000 crore via QIP. Do you think the valuations now are getting a bit stretched for some of these companies who are coming with QIP and raising money even when the stock is already moving up?

A: The only comment I would make is if you look at historic multiples and where we are trading today, perhaps, we are in the top half of where we have traded historically. And why we are trading at those multiple is that India frankly does provide a very strong growth potential which frankly, very few other economies in the world currently match. And as we have discussed, some of our companies, whether it be IPOs or QIPs, etc. do command a scarcity premium, so I would not rush into saying that whether valuations are stretched. We have always known that for certain sectors and certain Indian companies always command a premium, but that premium exists for very good reasons, that I have stated in the past, and we see no reason why that will not exist going forward as well.