ICICI Pru Life IPO: Why is it important for the Indian Market?

The Rs.6057 crore IPO from ICICI Pru has been oversubscribed by over 10 times. The institutional and the HNI portion were oversubscribed 11.8 times and 28.5 times respectively. The retail portion was just about subscribed but that was to be expected considering the size of the issue. But then, ICICI Pru Life is not just another issue. It is important because it is the first major IPO by an Indian insurance JV and will set the benchmark and a precedent for future issues. More importantly, this issue will be one of those veritable bets on the expanding Indian middle-class. So what exactly are the factors that make the ICICI Pru Life so uniquely special in the Indian context?

What it means for the ICICI Group…

The ICICI Banking group was gradually becoming a kind of a holding company for the group businesses. ICICI Bank’s foray into life insurance, general insurance, mutual funds and the securities business had all gained substantial visibility, maturity and traction over the last 20 years. The subsidiaries of the ICICI group were ripe to venture out on their own and raise fresh money from retail and institutional investors of their own accord. For the ICICI Banking group it meant that it can now monetize the properties that it has built over the last 20 years. Most of their businesses enjoy either leadership positions or near-leadership positions in their respective business lines. Monetizing the value of its subsidiaries and deploying the funds into its core banking business is likely to result in a better market valuation for the ICICI Banking group. Overall, it is a good step for the bank as a whole and it could be the beginning of many more strategic exits aimed at reverting to focusing on its core banking business.

Tapping the trillion dollar insurance market…

By global standards, India’s penetration, both in terms of life and non-life, is abysmally low. In terms of demographics, the average Indian population is much younger compared to China, Japan, EU or even the US. That opens up a massive market for insurance sales. As a more informed and techno-savvy population enters the Indian market, the demand for insurance products is likely to spurt sharply. This is the big story for insurers in India! The rising income levels and the broadening of the middle class base are also likely to be a major boost for insurance. Recent announcements like OROP, 7CPC, rural spending, rural infrastructure investments are also likely to spur income levels across India. This will mean greater spending power and therefore a greater willingness to manage risk through insurance. The ICICI Pru Life IPO has come at a time when the Indian economy in terms of the insurance market is at the cusp of a massive take-off. That is what makes this IPO special!

Insurance is another proxy for the consumption story…

When we talk of the consumption story in India, the obvious reference is towards the standard sectors like consumer durables, FMCG products, banking services, two wheelers, entry level cars etc. But most of us tend to forget that the real barometer of consumption demand could also mean insurance. As income levels expand and the complexity of risk rises, a technology savvy population will be willing to spend more for a bouquet of risk products like life insurance, medical insurance, accident insurance etc. We believe that a large part of the consumption demand in India in the coming 5 years could actually be directed towards insurance demand. The ICICI Pru Life IPO is special because it gives investors the chance to participate in a classic consumption story. A combination of higher incomes, greater risk complexity and greater awareness will create a sweet spot for insurance demand.

Finally, it is all about setting an industry benchmark…

The real reason why the ICICI Pru Life IPO is so important in the Indian context is that it is the first insurance IPO in the Indian Share Market. It is actually ironic that for a country with a GDP of $2.25 trillion and a market cap of $1.65 trillion, there was not a single listed insurance company. Of course, there was an implied insurance business in many listed companies but the value discovery happens only when the business is hived and listed. There are 3 key implications. Firstly, existing companies with an insurance franchise like HDFC, Reliance, Bajaj Finance, Max are all likely to get a more realistic valuation for their insurance business. Secondly, it will bring greater positive scrutiny of the insurance business once they are listed. For example, little was known about the inner workings of the IT industry till the big guns were listed. Insurance will find itself in a similar situation. Lastly, the success of the IPO underscores that the markets are comfortable with the valuations implicit in the IPO. That will provide a base case for future insurance IPOs. More importantly, it will also set a benchmark for consolidation in the Indian insurance industry. We have also seen the merger of HDFC Life and Max New York Life and the IPO benchmark could be a guide for the future.

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