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As HDFC Standard Life goes it alone, an IPO could be an attractive consolation

In recent weeks, HDFC Standard Life Insurance Co. Ltd. has watched one window of opportunity close as its protracted merger deal fizzled and another open amid renewed initial public offering talk for the Mumbai-based joint venture.

HDFC Standard Life had been planning to merge with Max Financial Services Ltd. to create India's largest private sector insurance company by first-year weighted individual premium income. But the two companies called it quits July 31 following a second rejection of their proposed tie-up by the Insurance Regulatory and Development Authority of India, which was unhappy with the idea of combining insurance and noninsurance businesses.

Now the life insurer — which is 61.53% owned by local mortgage lender Housing Development Finance Corp. Ltd. and 34.94% by Standard Life Plc of the U.K. — is pursuing other growth plans. The aim is for HDFC and Standard Life to float up to 9.57% and 4.53% of their respective stakes in the joint venture on the Mumbai bourse, according to an HDFC filing with the Bombay Stock Exchange.

Investors could be receptive to a pure-play insurance IPO, said Jagannadham Thunuguntla, head of fundamental research at Hyderabad, India-based Karvy Stock Broking. "I believe the IPO should get a robust response [from investors], considering what we have learned from the listing of ICICI Prudential Life Insurance Co. Ltd.," India's biggest IPO since 2010. Private insurer ICICI Prudential Life debuted on the BSE and National Stock Exchange in September 2016, raising 60.57 billion Indian rupees with an IPO that was 10x oversubscribed.

Santosh Singh, an analyst at Haitong Securities India Private Ltd. in Mumbai, said potential investors are unlikely to look less favorably on HDFC Standard Life because of the scuppered merger, given the company's solid market position.

HDFC Standard Life is India's third-biggest private life insurer, regulatory data showed. As of March 31, it had a 6.8% market share, with 36.36 billion rupees of first-year weighted individual premium income. State-owned Life Insurance Corp. of India, by far the country's biggest life insurer, had a market share of 46.1% with 245.19 billion rupees. The next largest was ICICI Prudential Life Insurance with a 12% share and 64.08 billion rupees. Private insurer SBI Life Insurance Co. Ltd., the second biggest among private life insurers, had an 11.2% market share and 59.38 billion rupees.

Growth potential

The growth potential of India's insurance could be one reason why investors would gravitate to the sector. In terms of insurance penetration, which measures premium income as a percentage of GDP, India ranked 42nd, and 13th for total premium income, according to a Swiss Re global analysis.

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Source: Associated Press

What's more, insurers in India, in general, have been benefiting from various reforms in recent years, including market liberalization, Monish Chatrath, New Delhi-based managing partner of MGC & KNAV Global Risk Advisory, said. That included legal changes in 2015 that enabled foreign investors to own up to 49% in local insurers, compared with 26% previously.

India's appetite for IPOs, meanwhile, is buoyant. According to EY, India saw 83 IPOs raising US$3.8 billion in 2016. The momentum appears to have spilled over to 2017, with 57 IPOs raising US$2.3 billion between January and June.

Against this backdrop, HDFC Standard Life's confidence in its IPO prospects appears increasingly "strong and robust," Thunuguntla added, pointing how the company had aimed to float 10% when it first announced IPO plans in 2016, increasing it to 15% for the listing it wants to complete by year-end.

HDFC Standard Life is not the only insurer with IPO plans afoot. SBI Life Insurance recently announced plans to sell up to 12% of its equity and ICICI Lombard General Insurance Co. Ltd. is looking to sell about 19% via an IPO.

"We have seen a lot of banking IPOs in India over the past one to two decades but now we will see more insurance IPOs," Thunuguntla said. "In India, insurance is highly underpenetrated. … The growth is expected to come."

As of Aug. 1, US$1 was equivalent to 64.07 Indian rupees.