SBI Life Insurance IPO Review – Should You Invest or Not @ Rs. 685-700?

by Shiv Kukreja on September 19, 2017

in IPO/NFO

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

SBI Life Insurance IPO Details

I covered the details of SBI Life Insurance IPO in my previous post yesterday. In this post, I have tried to cover its fundamental factors based on which we decide whether we should invest in this IPO or not. So, please go through these factors before taking a final decision.

Peer Comparison of Top 5 Private Life Insurance Companies

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Financials of SBI Life Insurance Company Limited

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(Note: Figures are in Rs. Crore, except per share data & percentage figures)

Comparing SBI Life’s fundamentals with that of its rival companies in the industry, there are many factors which augur well for SBI Life over its peer companies. In the previous 2-3 years, SBI Life has been the fastest growing private life insurance company among the top five private insurance companies listed in the table above. It has grown at a CAGR of 35.47% since FY15 as against HDFC Life’s 25.82% and ICICI Prudential’s 21.42%.

Moreover, its operating expense ratio at 7.83% has also been the lowest among the top 5 private life insurance companies listed in the table above. ICICI Prudential’s operating expense ratio comes next at 10.54% and HDFC Life’s expense ratio stands at 12.27%.

But, the question is why everything looks rosier when there is an IPO just around the corner and why it falters quickly after the money gets raised at high valuations?

ICICI Life Insurance came out with its IPO exactly one year from today and successfully raised Rs. 6,057 crore from the investors. Its Indian Embedded Value (IEV) on March 31, 2016 was Rs. 13,939 crore and at Rs. 334 a share at the time of its IPO, the company was valued at Rs. 47,957 crore. That made the company to be valued at 3.44 times its embedded value.

Now, as the SBI Life has come out with its IPO, its own Indian Embedded Value (IEV) has been calculated as Rs. 16,538 crore as on March 31, 2017. At Rs. 700 a share, the insurance company would be valued at Rs. 70,000 crore, which translates it to be 4.23 times its embedded value.

At 3.44 times, ICICI Life IPO looked expensive to me one year back, and even after one year of it getting listed on the bourses, currently it is trading at 3.8 times its embedded value. I still have a view that ICICI Life is trading at expensive valuations. So, if ICICI Life at 3.8 times its embedded value is trading at expensive valuations, then I think SBI Life is more expensive at 4.23 times its embedded value.

SBI Life reported Rs. 954.65 crore in profits, Rs. 9.55 a share as EPS and Rs. 55.52 as book value per share during the previous financial year i.e. FY 2016-17. At its likely issue price of Rs. 700 a share, the company is valued at 73.3 times its 12-months trailing EPS and 12.61 times its book value as on March 31, 2017. Despite of its rapid growth in the previous few years, these are highly stretched valuations the company is seeking from its prospective investors.

Like ICICI Lombard, SBI Life too is seeking a hefty premium of more than 50% over its last transaction of share sale in less than a year’s time. On December 9, 2016, SBI Life’s parent company, State Bank of India (SBI) entered into an agreement with Temasek Holdings and KKR Asian Fund to sell its 3.90% stake in the company for Rs. 460 a share. Now, just 9 months after that stake sale, its promoters are seeking a steep premium of 52% from its new investors, including the common investors like you and me.

Again, I think it is highly unreasonable to seek such a steep premium in such a short period of time. Even if the company succeeds in carrying out this IPO at Rs. 700 a share, I don’t think this investment could be a multibagger for its investors. I think it should list at a maximum of 10% premium to its issue price and a profit booking could drag its price below the issue price post listing.

So, at these valuations, I would avoid this IPO personally and advise my clients as well to do so.

{ 13 comments… read them below or add one }

Pandri September 19, 2017 at 10:38 AM

If possible, it would be a good idea for IPO analysts to include in their review what in their opinion is the correct IPO valuation along with reasoning. This would be not only educative to persons like me but would also help us make informed apply/avoid decision. Thanks.

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Shiv Kukreja September 19, 2017 at 1:36 PM

Hi Pandri,
Though your suggestion is good, it is very difficult to calculate/estimate the ‘correct’ or ‘justified’ value of a company in an IPO or for that matter, an already listed company. Just look at Dmart, its shares got issued at Rs. 299, it got listed at close to Rs. 600, and now it is trading at Rs. 1080. So, the question is whether the promoters were not aware of its ‘correct/justified’ value or the allottees who successfully got its allotment and sold their shares on listing were not aware of the same ??

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RAJARAMAN K R September 19, 2017 at 10:39 AM

Thank you Mr. SHIV KUKREJA and One Mint for their fair view on the SBI Life IPO offer which is of great help for retail investors like me.
The worthwhile part of the analysis is logical one based on reasonable financial analysis.
Continue your service to the investor community in future too

Reply

Shiv Kukreja September 19, 2017 at 1:37 PM

Thanks Mr. Rajaraman for your kind words! 🙂

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K joga rao September 19, 2017 at 5:16 PM

Thank you kukrejaji for your valuable baised analysis on both the recent IPO of Icici Pru life ins and SBI life ins. to stay away from investing…I have benefited a lot from your last min. analysis.

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Gaurav September 19, 2017 at 5:54 PM

Thank you Shiv. I was thinking of investing in the IPO but now will wait and watch. It makes sense to wait after the listing and see which way the share price goes.

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sanjiv September 19, 2017 at 8:58 PM

Thanks Shiv. Your advise always sounds good. Even I had the same opinion on this to avoid.

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Amit Gera September 19, 2017 at 11:12 PM

Thanks Shiv! Appreciate your unbiased and informative feedback!

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cheruvattath nirmala September 21, 2017 at 2:39 PM

Very pertinent info and highly objective analysis. Going the recommendations given by various brokerages in the financial papers, I was about to apply. But seeing your analysis which corresponds to reality I have given up the idea. Thank you very much.

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Vikas sughand September 21, 2017 at 4:41 PM

I have made subscription to sbi ipo for 105 shares…..So what do now…..and at what % it will list….pls reply

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Sanjeev October 16, 2017 at 5:32 PM

Stuck in same situation
Shiv kindly suggest.
Thanks in advance

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Vishwam September 27, 2017 at 7:40 PM

Thank u shiva.. giving good analysis to the new comer’s. based on ur review I stayed away to SBI and ICICI.. Good work and excepting same response in near future

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SREE October 4, 2017 at 6:52 AM

Thanks for your review…can u share you analysis about mas fin servies which is coming to market this month

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