HDFC Life IPO still some time away: CEO

Anuj: It is the first of the non strategic insurance stake sales in India and we have been talking about the insurance bill and how things are going to shape out. Could we see some more stake sales in future and by the time it list, what could be the potential shareholding pattern of HDFC Life?

A: I will be not the right person to comment on whether there will be any future sales or not. Obviously there is an agreement between the two key shareholders of HDFC Life, which is HDFC Limited and Standard Life wherein Standard Life has a right to acquire certain shares if the new insurance bill is passed. There is an understanding between the two shareholders and under that understanding this sale has happened where Premji Trust has been allowed to buy up to 0.95 percent. I cannot comment on whether more sales will happen in future or not.

Ekta: Would this be a pre-initial public offering (IPO) sale that you made to Azim Premji Trust?

A: The shareholders of HDFC Life have always been very vocal about the fact that they do want to take HDFC Life public at some stake. One of the important milestones for that would have been the passing of insurance bill, which has not happened but there are number of hurdles which we need to cross. The shareholders decided that maybe it was important to establish some kind of a benchmark and this sale has happened.

Is this is pre-IPO sale. I wouldn’t say that. I am sure before the IPO we would like some more anchor investors to come in; there are lot of people who are expressing interest in investing in HDFC Life and it is too early to say that this is a pre-IPO sale because the whole IPO process even if insurance bill is passed, will take anywhere between 9-12 months. We are far away from an IPO even today.

Ekta: I wanted some more understanding in terms of the valuations because one of the things that stood out is that the valuations post the Azim Premji Trust picking up that close to 1 percent stake, the valuations are at least 20 percents above what the analyst community was working with. Can you give us sense in terms of how exactly you arrived at these valuations and in your sense do you think there is more or how much upside potential to it?

A: Our involvement in this particular transaction was limited. This is a sale which happened between HDFC Limited and Azim Premji Trust. You are right that some of the analysts, if you look at the analyst reports, they were valuing HDFC Life at lower level but understand that most of those valuation reports or analyst reports were actually look at HDFC and they were ascribing some value to HDFC Life or their shareholding in HDFC Life. There are few analysts who are covering insurance industry directly and expanding the time to understand what the insurance industry valuations are and what they should be and what the dynamics of the business is. So most of the analyst reports are step down valuation and so they have not spent enough time. This particular transaction does indicate to the analyst community and the public at large as to what potentially the values being created in HDFC Life, we are quite delighted by that. I do expect the analyst community to pick this up and as the IPO fever catches on in the insurance industry, I am sure more analysts will spend time with us and the other insurance companies to understand the business and hopefully some of those numbers will start moving up in the right direction.Ekta: With regards to the IPO and the possible listing and the agreement that HDFC Life has with Standard Life at this point in time and my understanding is that if there is that composite FDI, FII cap that comes in at 49 percent either the FIIs will not be able to participate in the IPO in case Standard Life increases their stake to 49 percent or Standard Life will not be able to increase their stake to 49 percent or to whatever limits the FIIs participate. Would that be correct in terms of an understanding and if you could throw some light on that?

A: Sure, absolutely. I forgot to answer one of the questions you asked me earlier, let me just cover that. You said what is the valuation based on this investment which Premji Foundation is made it is close to Rs 21,000 crore based on the price at which they have invested in.

Now answering your second question; you are absolutely right that if Standard Life decides to take it to 49 percent then yes, obviously there is nothing left for FIIs under a composite cap. Standard Life, the statement that they have been making is that they would like to raise anywhere between 30-40 percent, though they could change their mind and if Standard Life decides to keep it below 40 percent there is enough headroom available for us to give a substantial or decent portion to the FIIs when we go and list.

Again, Standard Life has not publicly stated what that number would be but till now they have said that they might go up to 40 percent. I don’t know what the final number would be. Again, as I said it will depend on what the final shape of the insurance bill is. We are still waiting to see the exact wording in the bill as and when it happens.

Anuj: What is the current market share for HDFC Life? Last year it was close to 20 percent and secondly since HDFC Life announces numbers being part of HDFC, what kind of growth can we expect in next financial year?

A: If you look at the market share of HDFC Life in private sector and if you look at the individual WRP data which is what we use internally to assess our market share we are upwards of 15 percent at this point in time. We have never touched 20 percent on the basis of those numbers. If you look at the overall market our share is about five and half percent. We are growing at the rate of about 24 percent against industry which is low single digit number at this stage. So we are quite happy with our performance through the year. The insurance industry continues to grow to tough times. This year LIC has not been doing very well after a very good year last year. The overall numbers for the industry remain anemic. They have frankly not even grown over the last five years.

So, insurance industry has struggled through this period partly driven by economy, partly driven by the fact that the regulator has brought in lot of customer facing changes, positive changes that has impacted the growth in this industry and we are hoping that with the economy reviving with some of the reforms expected including on the insurance bill and new investments coming in this growth will come back and we very strongly believe that HDFC Life has been making the right investments to position itself and create a platform that when the growth comes back we will grow faster than the industry but this year when compared to the industry we are doing much better.

Ekta: I just wanted to get your sense in terms of what the FII interest or FDI interest rather is looking like within the insurance space post the developments of the winter session? Now the government is most likely going to pass the FDI insurance bill via an ordinance we had some expert opinion that came on the channel which indicated that maybe FDI investors might not be as confident when the FDI insurance bill is via an ordinance. Is that your thought process as well in terms of interactions that you have had with the FDI community rather the FII?

A: There is a lot of interest in the insurance sector, there is no doubt about that especially with all the hoopla which has been created around that the insurance bill is going to become reality soon. Now if they decide to pass the ordinance my belief is that people will be a bit hesitant if they make the investments or they take the steps towards making the investment and then the kind of ordinance lapses because insurance bill is not passed.

So there is a little bit of hesitancy on the part of FDIs because it is an important investment, it will require a lot of money and they don’t want uncertainty around it. So, let’s see what that ordinance means and what the government plans out to ensure that in the Budget session of the parliament this bill does become a reality, but yes, I would expect some amount of hesitancy because the amount involved is large. Given what has happened in the winter session of the parliament people are worried as to whether the government has a wherewithal to push some of these bills through and exactly how it has played out in the Rajya Sabha in the last 10-15 days or so, because if some issues can be found in winter session I am sure some issues can be found in Budget session of parliament also not to allow some of these bills to go through.

Ekta: We have seen the Azim Premji Trust invest around one odd percent and with the uncertainty with the management control something that you had mentioned last time do you think that domestic players will start showing some interest in the insurance space as opposed to just FIIs and FDI?

A: When I said FIIs I meant both domestic and international. There is a lot of interest in the domestic investor community also to invest in the insurance sector. Again I am not privy to how many people have approached HDFC Limited to invest in HDFC Life but generally when you talk to investors, domestic investors too, there is a lot of interest in premium brands like HDFC Life or companies which are doing well and have been able to create a space for themselves in the last couple of years.

So yes, I do see a lot of interest. Again, this is all within the framework of all the things which are happening in the insurance industry. The industry itself, the bill, the interest of some of the foreign investors and what rights they have. So under all that various variables which are out there let us see how many transactions happen and in what timeframe they happen.