HDFC Life insurance coverage firm trades within the inventory market at greater than 5 instances its embedded worth ( EV), a key market valuation parameter for all times insurance coverage firms. The opposite two listed insurance coverage biggies – ICICI Pru Life and SBI – will get a market valuation of over 3 instances their respective EVs. Will the nation’s largest insurer Life Insurance coverage Company (LIC) get pleasure from an identical valuation from public traders ?
The inventory market is a ruthless place as seen within the nation’s greatest IPO in historical past –Paytm — the place the traders have hammered the corporate’s valuation.
Let’s first perceive the important thing parts of EV. The EV is the sum whole of current worth of all future income from present enterprise (insurance coverage insurance policies ) plus internet value, which incorporates capital. Globally, the life insurance coverage firms are valued at a a number of of EV.
There are experiences that LIC’s EV is round $150 billion (or Rs 11.25 lakh crore). For the reason that market valuation is at all times over and above the EV, the a number of of 3-5 instances loved by the non-public gamers ought to be relevant to the insurance coverage big LIC, which has a market share of 60-70 per cent regardless of competitors from over two dozen non-public gamers.
However it’s simpler mentioned than performed.
Consultants level out that the normal financial savings product mixture of LIC will are available in the way in which of getting 3-5 instances EV a number of out there. There’s a legal responsibility on the a part of the LIC to pay again policyholders in its a refund and different financial savings insurance policies on the time of maturity. The non-public gamers, nevertheless, have a better share of safety plans, which additionally brings larger income and better valuation.
Secondly, LIC’s profit-sharing association of 95:5 with policyholders and shareholders for collaborating enterprise can also be not beneficial for traders’ group. In non-public insurance coverage firms, the shareholders will get a better share of income at 10 per cent whereas the policyholders will get 90 per cent.
Whereas LIC would shift to personal sector mannequin of 90:10, which can also be required by the insurance coverage regulator IRDAI, however it will take a minimum of 3-5 years for the brand new association to be efficient.
The high-cost construction of LIC with enormous brokers workforce may also are available in the way in which of matching the non-public sector valuation multiples out there. LIC’s fee ratio, which is gross fee paid to gross premium, is 5.40 per cent as in comparison with 4.56 per cent, say for HDFC Life. The non-public sector insurance coverage firms are utilizing the fee efficient bancassurance mannequin of promoting insurance policies, which is an association between banks and insurance coverage corporations, permitting the latter to promote its merchandise to a financial institution’s clientele.
As well as, there are fears within the minds of traders that LIC will stay as a lender of final resort for the federal government. Prior to now, LIC has at all times stepped in to bail out the federal government. IDBI Financial institution’s bail out is a latest instance the place LIC needed to pump in enormous quantities of capital for a majority stake within the struggling financial institution.
Given the negatives, there are consultants who give LIC a valuation of round 1.3-1.4 instances its EV.
Actually, the outgoing Chief Financial Advisor Ok V Subramanian had earlier made a wild guess that the federal government might mobilise Rs 90,000 crore by promoting 6-7 per cent stake in LIC. Subramanian’s calculation had put LIC’s valuation at Rs 12.85-15 lakh crore. The experiences of LIC’s EV at Rs 11.25 lakh crore suits in nicely with a a number of of 1.3 to 1.4 instances, which is able to give it a market valuation of Rs 14.62 to Rs 15.75 lakh crore. Subramanian, too, predicted an identical quantity.
Clearly, the general public itemizing of LIC will make it as one of many prime 5 largest firms when it comes to market cap, becoming a member of the marquee membership of RIL, TCS, and HDFC Financial institution.
HDFC Life, whose EV is Rs 26,617 crore in 2020-21, has a market capitalisation of Rs 1.40 lakh crore. SBI Life with an EV of Rs 33,390 crore, enjoys a market capitalisation of Rs 1.15 lakh crore. Equally, ICICI Pru Life, that has an EV of Rs 29,106 crore, has a market cap of Rs 88,528 crore.
Additionally Learn: Equitas Small Finance Financial institution, HDFC Financial institution to supply co-branded bank cards
Additionally Learn: Market euphoria is up for a actuality test, says Dhiraj Relli of HDFC Securities