A year ago, a multi-structure merger transaction between HDFC Life Insurance and Max Life had aimed to create the largest private sector insurer, and it pinned a valuation of Rs45,000 crore on HDFC Life alone.

Today, that deal has fallen through, but HDFC Life, the third largest private sector insurer, is going ahead with an initial public offering (IPO). Its promoters would want its valuation to remain close to what the merger had envisaged, if not higher.

After all, the insurer’s embedded value has risen to Rs12,390 crore for fiscal 2017. Final valuations depend on what merchant bankers and selling shareholders determine at the time of the IPO. But there are enough factors to support HDFC Life in commanding the valuation envisaged by the merger deal last year.

Firstly, the quality of HDFC Life’s product mix is superior to ICICI Prudential Life Insurance, since 53% of its portfolio comprises traditional policies unlike a larger 74% share of market-linked products in the case of the latter.

HDFC Life has a stronger franchise as its direct business network of branches contributes to more than half of the new business premium. HDFC Life’s new business premium has grown at a compounded annual growth rate of 17.8% for the five years to FY17 and is the highest among private insurers, according to the prospectus.

Another factor that can play for the success of HDFC Life’s IPO is that unlike last year, the stock could be cheaper, compared with ICICI Prudential Life Insurance.

That is because the ICICI Prudential Life Insurance currently trades at a multiple of four times its embedded value of fiscal 2017 while a valuation of Rs45,000 crore would put HDFC Life at a multiple of 3.7 times its embedded value.

Recall that ICICI Prudential was launched at a discount, compared with HDFC Life, last year. Despite that, on the day of listing, the stock tumbled 11% on worries that its valuation was steep. The stock listed at Rs330 apiece and has gained an impressive 29% to Rs427.15 per share in just 11 months. Its success lends a helping hand to HDFC Life’s offering.

But if HDFC Life is viewed in a different light—that of past transactions—then valuations begin to look a bit frothy. In 2014, PremjiInvest, an Azim Premji owned firm, picked up about 1% stake in HDFC Life for Rs200 crore. The transaction had valued the insurer at not less than Rs20,000 crore. A year later, when international partner Standard Life increased its stake in the company, the transaction valued it at close to Rs19,000 crore. But these are valuations from a few years ago and its growth since then has been impressive.

The bullishness in the equity markets, especially for insurance stocks, cannot be ignored, too. If not for its strong business metrics, exuberant markets may help HDFC Life’s IPO sail through without breaking a sweat.

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