How long can HDFC Life maintain the IPO zing?

Coming from the HDFC stable and that too an initial public offering (IPO) after 22 years, hopes were high on HDFC Standard Life (HDFC Life). The company, too, didn’t disappoint its investors one bit. In fact, with listing gains of 19 per cent, HDFC Life’s stock market debut has far exceeded the show put up by ICICI Prudential Life Insurance (I-Pru Life) last year, or even the recent entry of SBI Life. 

Interestingly, I-Pru Life is the market leader in the private life insurance space, with SBI Life taking the second spot, while HDFC Life trails both, taking the third position in the pecking order. Yet, a lot of factors – Indian equities’ upbeat mood post Moody’s upgrade on Friday (November 17), HDFC’s parentage and more importantly, the strong anchor investor demand, seem to have supported HDFC Life’s stellar entry. Presumably, HDFC Life’s IPO witnessed a record participation from anchor investors (estimated at Rs 50,000 crore), which market experts say is the largest anchor book garnered since the inception of the anchor investor concept in 2009.

The institutional response isn’t any surprising given the scarcity premium enjoyed by HDFC Bank and HDFC Limited, whose stocks have cemented their position in the foreign portfolio investors’ buying list for long. 

Yet, if investors were to corelate fundamentals with these technical aspects, they don’t add up much. 

Post listing, HDFC Life trades at over 4x FY18 estimated embedded value (EV). EV is the present value of future profits of a life insurance company plus the adjusted net asset value. This helps value life insurance companies. Compared to 3 – 3.5x FY18 price to EV of I-Pru Life and SBI Life, HDFC Life trades at a premium. But, is this premium justified?

Investors also need to look at the gap in the business value HDFC Life and its top two peers (see chart). Disregarding this factor, some analysts believe that as most HDFC group companies trade at significant premium, HDFC Life’s steep asking rate too is justified. But the key point to note is that HDFC Bank and HDFC Limited have earned their premiums over the years because of their capacity to emerge as market leaders in the domain that they operate. This factor is still missing for HDFC Life. Some analysts also raise concerns on volatile earnings of the life insurance space, which has been a key reason restricting the valuations of listed players. 

“In a few months, we will know the consistency of HDFC Life’s financials. If it doesn’t match the expectations, premium valuations should reduce. Equally important is the behaviour of its anchor investors. We need to see how the stock performs once the anchor investors redeem their investment in HDFC Life,” says an analyst from a foreign brokerage, not willing to be named. 

Therefore, for at least the next 30 days, until anchor investors’ holding period lapses, analysts say HDFC Life stock is most likely to stay afloat. The real test would start after that.