Narrow-moat ICICI Bank’s board approved the sale of a 6% stake in its life insurance business, with 4% going to Premji Invest (private equity) and 2% to Temasek (sovereign wealth fund).
The deal values the business at Rs 325 billion, or $5 billion, which represents a fiscal 2015 price/earnings ratio of 20 times; in our view, this is a reasonable valuation. ICICI's insurance arm has a leading market share of 12.5% in India, and continues to enjoy double-digit growth, with an 18% growth in new business premiums witnessed by private insurers in 2014, as per industry sources.
The valuation compares favourably to multiples in the Chinese life insurance market, which witnessed a growth of 18% in 2014 and growth of 23% in the first nine months of fiscal 2015. Morningstar’s valuation on pure-play Chinese insurers AIA Group is 18 times the price/earnings ratio, and that for China Life is 16 times.
The Rs 20 billion cash that ICICI Bank will obtain from this transaction will add a negligible amount to the overall capital position of the firm, representing just 1% of our Rs 1,833 billion enterprise value estimate for the consolidated entity, or Rs 1,567 billion market capitalization as of Nov. 20. Overall, this transaction does not affect our valuation of the bank.
Furthermore, we believe the better strategy to unlock the true value of the insurance firms is to spin off the insurance firms and to separately list them at an appropriate time. We believe this will enable the stock price to meet our fair value estimate, as the stock continues to trade at a 18% discount to our Rs 327 per share, or $10 per GDR, fair value estimate.
