In reaction to the cabinet’s approval to hike foreign investment ceiling in the insurance sector to 49% from the present 26%, Vibha Padalkar, ED & CFO, HDFC Life and Gautam Mehra, ED, PwC discuss how this will help alleviate the stress in the sector.
Padalkar welcomes the move and adds that this will help bring in a lot of dynamism to the industry wherein the industry, ultimately, stands on its own feet.
Both Padalkar and Mehra are of the view that the requirement of capital in the industry is very high.
“We must remember that this is a very capital intensive industry. Already about Rs 33,000 crore has been invested as capital and a further Rs 50,000-60,000 crore is required before companies actually breakeven and start making profits,” said Padalkar.
Answering the question on how soon how soon foreign participation may come into the Indian insurance sector, Mehra said it would depend on the requirement for capital or the urgency for requirement of capital at each company level. It will drive how quickly that company goes back to its shareholders for further capital or goes to the public market for further capital.
Below is the verbatim transcript of the interview
Q: How important is this hiking of the FDI limit in the insurance sector? Structurally, how will this help alleviate the stress that the sector has seen for so many years?
Padalkar: This is something that has been promised to the industry right from the beginning. It is, to some extent, living up to these promises. Also, we must remember that this is a very capital intensive industry. Already about Rs 33,000 crore has been invested as capital and a further Rs 50,000-60,000 crore is required before companies actually breakeven and start making profits.
Where will all this capital come from? That question could very well be answered now once this is passed by the parliament wherein companies can tap capital both from local shareholders as well as overseas investors. This will also help bring in a lot of dynamism to the industry wherein the industry, ultimately, stands on its own feet. It is a fairly open market kind of an economy for the industry.
Q: Do you think enough rules are in place in India to ensure that the industry is secure? There are legitimate concerns both in political and in civil quarters that after especially events like AIG, would it happen that some foreign insurer is in trouble in its place of origin, and therefore, decides to quit the Indian market? Would there be, therefore, possible distress? Are enough rules in place in terms of ring fencing the capital that comes, sinking fund etc.?
Mehra: It is important to note that we have had foreign investment in this sector up to 26 per cent for the past few years. You mentioned about AIG, but look at how the industry or the regulator has got over that; it has not really impacted the business of that entity here. With that experience in hand and given the concerns of the industry around capital raising, as Vibha correctly pointed out, the requirement of capital far exceeds the potential risk. We have already had an experience of having foreign investment in this sector for the past few years without any mishaps.
Let’s not forget, we have a regulator in place which will oversee the business closely, whether it is about the governance framework, the risk framework, the policies, the kind of products you can sell, how you can manage the money - all of that is being clearly regulated on an ongoing basis.
Q: How does this change the situation on the ground for you in terms of listing? If this indeed were to come, would you see some companies getting listed in a couple of months or maybe in the year?
Padalkar: Definitely. The timeframe really depends on what is right for each company. But I would imagine that at least one of the questions that every company would have had that is, when will FDI or FII relaxation happen?
Hopefully, that question would be out of the way. What remains is the fundamentals of each company and that would differ widely. Once both the micro and the macro elements for a particular company are right, and targets are met, there is nothing stopping the company from going in for an IPO.
Q: Realistically, how soon do you see foreign participation come into the Indian insurance sector? Do you think deals could get consummated within this fiscal itself or do you think it will take more time?
Mehra: I think we have to segregate that into two parts. One is obviously depending on the requirement for capital or the urgency for requirement of capital at each company level. It will drive how quickly that company goes back to its shareholders for further capital or goes to the public market for further capital.
I think one important point to note here is that these talks or proposal is to increase the foreign investment in insurance companies from 26-49 per cent. The company would have an option either to raise additional funds from its existing shareholders to raise the percentage of that shareholder from 26-49 per cent or to go and attract foreign investment through the FII route coming in for a listing.
Secondly, if you look at new players coming in, honestly I don’t see action immediately on the ground, because such things take time.
Q: Would you estimate how much money might come in two years?
Mehra: Difficult to hazard a guess on that. It is also driven by the other macro environment in the country. Foreign players, of course, are interested in this business but they will also be looking at the other macro factors.
Q: Would HDFC want to monetize its investments? Mr. Mistry spoke to us about fair value. Where would you place fair value?
Padalkar: It is difficult to say because no private insurance company is now listed in India. But if you look at the two recent deals, the Max deal as well as the Reliance deal, they have enjoyed pretty rich valuations. The deals have happened about 3x of embedded value, which is really the discounted cash flows of all our future earnings.
If you go by that whether we will get those kind of valuations or more because of the brand that HDFC enjoys, is something that is hard to really have a view on, at this point in time. But we are hopeful that given these two recent deals, it should be a pretty attractive proposition in terms of valuation for the company.
Q: There are some analysts on the street who believe that if HDFC reduces its stake from 72 per cent to 51 per cent, it may lead to capital gains of around Rs 2,200 crore plus. Is that a realistic assumption or do you think you cannot make any kind of assumptions at this point in time?
Padalkar: Yes, it really depends on what would be the agreement between the promoters. Keki Mistry mentioned just recently that Standard Life have an option to take up their shareholding as and when FDI relaxation happens. Whether they will take it up to the full 49 per cent or leave some headroom for FIIs, any number of permutations is possible. It is little bit premature to contemplate what would be the final arrangement between the promoters. Any one of these outcomes is possible.
Q: You would agree that things would happen at 3x or that was one-off because somebody wanted a strategic voice in that business?
Mehra: As Vibha mentioned, there had been two transactions which have happened around that value and that seems to be more than a coincidence. So maybe, that may set some benchmarks for valuations.