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Insurance FDI hike to bring in Rs.50,000 Crore Capital

(Disclosure:I am market making in the shares of ICICI Pru Life)

The passage of the Insurance Bill in the Lok Sabha is most welcome as it would spur the sector’s growth and penetration of insurance, and bring in Rs.50,000 crore capital, said a top official of Life Insurance Council.

“We have been wanting this for a very long time for industry’s betterment. Life insurance is capital intensive and needs large doses of the same for the industry to grow,” V. Manickam, secretary general, Life Insurance Council told IANS.

The proposed law increases the foreign direct investment (FDI) cap to 49 percent from the current 26 percent, a major demand of the industry players.

Manickam said that if the FDI limit is increased more foreign players would come to India as the uninsured population in the country is around 30 crore.

He said the upward revision in the FDI limit is expected to result in additional capital infusion of around Rs.50,000 crore in five years’ time.

Manickam hoped that Rajya Sabha too passes the bill so that it becomes a law.”The total capital of the life insurance industry is now at around Rs.30,000 crore of which the foreign component is 26 percent. On the face value a minimum of Rs.7,500 crore additional fund is expected to come,” Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services told IANS earlier.

However, dilution of equity stakes does not happen at par values, he remarked.”As per market value, an additional infusion would be around Rs.55,000 crore,” Parekh added.

According to him, life insurers that are 10 years’ and above old would get a valuation of seven to eight times of their original investment whereas for companies that are around seven years’ old it will be six times and for those which are much younger the multiple will be two to four times.-from Deccan Herald

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ICICI Pru Life’s assets crosses 1 Lakh Crore

(Disclosure:I am market making in the shares of ICICI Pru Life)

ICICI Prudential Life Insurance’s decision to shift focus back to unit-linked insurance plans (Ulips) has paid off, with the private insurer being the first to cross Rs 1 lakh crore mark in terms of assets under management. The company, which generates nearly 80% of its new business premium through the sale of Ulips, has seen new business grow 40% during the first nine months of the fiscal – as against 16% growth by other private companies and with LIC showing a fall in new business premium.

“We are the only private insurer with assets of over Rs 1 lakh crore. In the mutual fund industry — which has been around longer, seen consolidation, and has significant wholesale assets — there are only four or five private funds with assets over Rs1 lakh crore,” said Puneet Nanda, executive director, ICICI Pru Life.

The growth in assets are a big boost for the insurer as it comes at a time when its parent ICICI Bank has an opportunity to unlock value with the government notifying amendments to allowing foreign direct investments up to 40%. ICICI Bank has been looking at selling a minority stake, similar to HDFC which sold a 0.95% stake to Azim Premji Trust for Rs 198.9 crore, valuing the company at close to Rs 20,000 crore. HDFC Life has moved up to the number two slot following a growth push last year. ICICI Prudential has been in the number one position consistently since the industry opened up in 2000.

According to Nanda, the growth in AUM will have implication for earnings. “A large part of the costs are fixed, which includes infrastructure cost and employee costs. The more scale you build up, the more you are able to defray costs and you are able to become more efficient. In our case since a large part of the business is Ulips, the earnings are from fund management charges.”-from TOI

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BSE Beats NSE in speed

(Disclosure:I am market making in the shares of BSE)

Emphasising that “speed and execution” were the essence of stock exchange business, Ashishkumar Chauhan, managing director and CEO of Bombay Stock Exchange (BSE) on Friday said BSE under him has become 10 times faster than it’s rival the National Stock Exchange. In the next three years, BSE plans to become 10,000 times faster.

“Speed is the essence of stock exchange business… During the last 20 years, BSE was slower than the NSE… Five years back when I joined the BSE, we were 30 times slower than the NSE. BSE used to give a response time of 300 milliseconds, while NSE had a response time of 10 milliseconds. So we were slower in giving information and execution. If your response and execution time is slower who will come to you. So between 1994 and 2014, people slowly moved over to the NSE, because if you stayed at BSE you will not make profits. The other guy who is getting faster information and execution will corner the profits,” said Chauhan while retracing the history of BSE while speaking on the topic of “Indian Capital Market Evolution & Path Forward,” he said while delivering a lecture at Nirma University in Ahmedabad

Addressing an audience largely consisting of students from the University, the CEO of BSE said that in the last few years, the Bombay-based exchange has overcome a number of hurdles including absence of a pan-India distribution network and dealing with a manpower that was not “IT-savvy”. “We worked hard for three years to upgrade from 300 milliseconds to 10 milliseconds. By that time, NSE went from 10 milliseconds to two milliseconds, so again we were slower by five times (compared to NSE),” he said.

“We then changed our technology which was not easy…. and today BSE is 10 times faster than NSE, i.e from 2014 onwards. So, 10 milliseconds we went to 200 micro-seconds, while NSE remained at two milliseconds. So we are now faster in getting and giving information. In next three years, we will give you a response time of one-tenth of what it is today. So from 200 micro-seconds, we will go to 20 micro-seconds and that will make us 10,000 times faster than our current speed,” Chauhan said about BSE that had entered into a strategic technology alliance with Eurex in March 2013 and deployed a new generation trading system.

“Earlier, our capacity was 5000 orders in a second. Today it is 5 lakh orders in a second and a response time of 200 micro seconds. Just to give you a scale, if IRCTC does 5 lakh railway bookings in a day, it is considered to be a great day for them. At present there is no such system in the country today (like the one we have),” he said adding that BSE’s technology was “scalable” and can easily move up to 50 lakh orders in a week’s notice by “adding a few Intel boxes”.-from FE

 

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Alice in Wonderland Valuations for Indian Equities

The second data point is a list of 70-odd Indian listed companies where between 50-85% of the free float is captured by foreign and local institutions (ex-insurance companies). And since the incentives of people at the helm of such institutions are heavily loaded on the long side, they would do anything to keep the NAV and AUM up.

So we have companies trading at 50x and 60x and 70x and even more than 100x P/E; and this despite the underlying corporate earnings not really justifying such valuations. The P/E (trailing twelve months) of Colgate has gone up from 34x in April 2014 to currently 48x. Similarly, Nestle from 42x to 53x, HUL from 33x to 44x, Dabur from 36x to 43x, Marico from 28x to 38x, etc. This is despite sales growth being slowest in the last many quarters for some of these companies (in some cases, up to eight quarters!). Similarly the P/E of some pharma companies have gone from mid-20x in April 2014 to mid-30x currently. The two other sectors which are captured by these institutions (partly overlapping with the two mentioned above) are MNCs and scarce/unique ideas. So, any MNC with a 75% parent holding is supposed to be a delisting candidate that justifies a ‘mu-maangi kimat’ for the tenderer (Blue Dart > 115x, 3M 90x, Kennametal 90x, Glaxo Pharma 60x, Bosch 60x). Scarce concepts in the listed space also command mind-boggling valuations (Just Dial 80x, Info Edge 80x, Jubilant Foodworks 75x, Page Industries 70x, Eicher Motors 60x etc.).

The valuation of concept stocks in the unlisted space are truly what Warren Buffett calls Alice in Wonderland (upto 1000x sales!). Finally, we have some random stocks from not-so-fancied sectors such as retail, textiles, ancillaries, construction/realty and capital goods etc. which also find a place in this list; clearly a case of the fund manager trying to buy as much floating stock as he can, so as not to let his NAV drop and pre-empt a premature end to his career-wrote Chaitanya Dalmia

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ICICI Pru Life to sell stake at 6 Billion $ valuation

(Disclosure:I am market making in the shares of ICICI Pru Life)

ICICI Bank and Prudential Plc are looking to sell at least a 5% stake in their insurance joint venture, ICICI Pru Life, to financial investors such as private equity firms and sovereign wealth funds, in anticipation of Parliament clearing the ordinance raising the foreign investment cap in the sector to 49%.
Morgan Stanley and Bank of America Merrill Lynch (BofAML) have been mandated by ICICI Prudential Life — which is running the process — to bring in investors, said multiple sources aware of the possible transaction. Most see this exercise as an attempt to discover a valuation for a planned IPO in the near future or to discover a price at which Prudential Plc could increase its stake in the venture, India’s largest private life insurance company by sum assured and premium income. ICICI Pru ..

ICICI Prudential is present in 489 locations in India through 559 branches as of March 31, 2014 with over 5,000 partner points of presence. Bancassurance or distribution by banks accounted for 61.2% of the total business. Its market share as of December end was 11.4%. “This is part of the journey to establish price as there are no benchmarks in the industry,” said Alpesh Shah, partner, BCG.

The paid-up capital of the company is Rs 1,429 crore and its net worth stood at Rs 5,144 crore as on December 31, 2014. ICICI Pru Life had a profit after tax of Rs 462 crore in the third quarter of 2014-15 compared to Rs 428 crore in the same period last year. For the April-December period, profit after tax was at Rs 1,243 crore while premium income from new business was at Rs 3,585 crore.

The company has seen an increase in its market share to over 11% during the nine months to December 2014. Its product mix is skewed more towards unit-linked insurance plans, which is largely on the back of the rising stock market. Till December-end, the company used to manage assets worth Rs 94,593 crore. The total sum assured by ICICI Pru Life, including the group insurance business, increased by 9.5% from Rs 2.75 lakh crore at March 31, 2013 to Rs 3.02 lakh crore on March 31, 2014. –from ET