SBI Life's $1 billion IPO opens; what analysts say

NEW DELHI: The Rs 8,400 crore initial public offering ( IPO) of SBI Life is all set to hit the market on Wednesday.

The insurance company, which is targeting 35-40 per cent growth in new business premium (NBP) collection in the ongoing financial year, has set the price band for the issue at Rs 685-700 per share.

The joint venture between SBI and BNP Paribas Cardif, the insurance arm of BNP Paribas, would be offering a discount of Rs 68 per share on the offer price to eligible employees.

At the upper end of the price band at Rs 700, the issue is priced at 4.2 times its FY17 embedded value of Rs 165 per share, which is higher than ICICI Prudential’s 3.8 times its FY17 EV. But analysts attribute this to SBI Life’s stronger brand value.

Most analysts have a subscribe rating with a long-term horizon on the issue.

SBI Life is India’s largest private life insurer in terms of NBP generated in each financial year since FY2010 and has a portfolio of 29 individual and eight group products. NBP for an insurance company is the premium it earns from new contracts in a given financial year, including the single premium for that year, the first year premium on regular premium policies written in that year, and from those written in previous years.

SBI Life distributes its products through 24,000 SBI bank branches in addition to 8,500 branches of other banks. The company reported highest new business premium (NBP growth) of 42.8 per cent in FY17, compared with 22.9 per cent average growth for private peers.

The company is well positioned to capitalise on India’s low insurance penetration and the widespread bancassurance network and plans investment in individual agency channels with an emphasis on the digital platform, analysts said.

IIFL Wealth Managers in a note pointed out that SBI Life had the lowest total cost ratio among private life insurers, which is backed by an impressive control over operating expenditure.

“This, coupled with improving persistency and mortality experience, is driving an expansion in VNB margin. Operating return on EV (RoEV) stood at a handsome 23 per cent in FY17, while solvency ratio of 200 per cent implies a healthy financial position. In our view, the IPO priced at 4.2 times FY17 EV (10 per cent premium to ICICI Prudential Life) factors in relative franchise strengths to an extent. However, it is not fully reflective of the structural value that high growth and improving margins could create in the long run,” the brokerage said, adding that it has a ‘subscribe’ rating on the issue.

Centrum Broking, which had a critical view on some of the recent IPOs, has recommended a ‘subscribe’ rating on SBI Life.

“The issue seems fairly priced, considering SBI Life is a market leader in most of the parameters – private market share of 20 per cent in NBP against HDFC Life’s 17.2 per cent, ICICI Prudential's 15.5 per cent Max Life’s 7.2 per cent; highest renewal premium CAGR over FY14-17 at 24.2 per cent compared with private peer average of 13.8 per cent CAGR; least cost ratio of 11.6 per cent compared with 18 per cent of that of peers. Going ahead, the company is expected to benefit further from the vast bancassurance and private agent network along with its extensive reach and market share,” the brokerage said.

It expects the insurer to attract adequate investor interest on the basis of its leadership position and expected healthy growth compared with its peers.

“Given that the current valuations are mature, investors can subscribe to the issue with a long-term perspective. However, it must be noted that, insurance being a steady business, it may not attract major listing gains,” it warned.

SBI Life has registered over 50 per cent growth in annual premium equivalent in August, largely driven by a rise in ticket size, indicating sustained momentum in Ulips. Annualised premium equivalent (APE) is a common measure of ascertaining the business sales in the life insurance industry. It is the sum of the regular annualised premium from the new business plus 10 per cent of the first single premium in a given period.

Brokerage Edelweiss Securities believe rising financial savings and higher inflows post demonetisation is helping the industry register impressive growth. The brokerage anticipates proclivity for financial savings to continue and the ongoing industry growth momentum to sustain going forward.

For SBI Life IPO, investors can bid for a minimum of 21 equity shares and in multiples of 21 thereafter. The offer will close on Friday.