Friday, September 30, 2016

IPO ICICI Prudential Life Insurance co Ltd .

Most  investors  make  the  mistake  of  thinking  that  the  IPO  is  once-in-a-lifetime  opportunity to buy the aspired stock.  It is not!
Rather it may be the once-in-a-lifetime opportunity for the promoter and early stage investors to get the best possible valuations. And hence they leave no stone turned to make the months in the run up to the IPO look like a dream to prospective investors.
Now if you are not investing in a company for a quarter or two, the latest quarter’s performance should hardly matter.  But unfortunately that is what most investors look at. And this is why you will find most companies debuting on the bourses in their most profitable year or when the sentiments at the peak. If the profits and the sentiments do not last, it is very likely that investors may end up buying a mediocre business at an expensive price in the IPO. 
Buffett has explained that the mathematical probability of fetching a good stock at cheap valuations in its IPO is minimal. Therefore, investors hoping to become IPO millionaires have to rely on luck apart from their value investing skills.
IPOs and the Less Knowledgeable Buyers : It’s  almost  a  mathematical  impossibility  to  imagine  that,  out  of  the  thousands  of  things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).
These words of Warren Buffett explicitly manifest his unwillingness to invest in IPOs.
The billionaire passed on the opportunity to subscribe to Google's IPO in 2004, which was offered at over 52 times earnings. In addition to Buffett's general reluctance towards the business models of most internet companies, Google's early valuations clearly didn't interest him.
The  stock  returned  nearly  1400%  in  ten  years,  proving  Buffett's  intrinsic  value calculations  wrong.  But  he  didn't  compromise  on  his  margin  of  safety  criteria,  and  the legendry investor never regretted his decision.
On the ICICI Purdential life Insurance company debut on stock exchanges, just to refresh my memory. I knew the flavor of Insurance industry as a disclosure I worked with ICICI Prudential life sales team in
2004. It was the time company was growing at a ballistic pace in sales and revenue. I recollect a young chap joined as Head of sales force, he was used to keep sales missions on selling life insurance policies. The team was so much charged up and selling policies left, right and center. Top sales men were heros of the company, such highly aggressive sales practice in all regions made ICICI Prudential life Insurance company as No 1 private life Insurance company and also NO 1 in policy lapsation by 2009. About 7.70 lacs conventional policies worth Rs 25269 Cr lapsed, highest among the private life insurers by value (As per IRDA Hand book published in 2009).
Later on change of management in 2009 at top deck brought persistency and improved focus on quality of sales, off course stringent measures by IRDA helped the company to maintain quality.  ICICI group strong channel alliances helped ICICI prudential life insurance co Ltd to remain as Top private life insurer. 
Challenges in Valuing Insurance Businesses
Very  few  businesses  have  a  demonstrable  or  predictable  level  of  repeat  business  from customers. Life insurance, by its very nature, primarily sells long-term contracts with  annual  premiums  and  expectation  that  a  portion  of  those  will  get  renewed  year-on-year. Additionally, it considers life mortality assumptions to create adequate reserves for future pay-outs on account of death, maturity or surrender of policies. These challenges could impact growth as well as valuation assumptions.
The basic principles of valuation are applicable to the insurance sector too, just as they apply to other sectors. However, some unique aspects can affect how they are valued. Calculation of debt is difficult to estimate and measure. Frequent regulatory notifications and considerations too affect valuations. The regulations on channels impact distribution relationships with a potential to positively or negatively affect valuations.


I will remain positive on the growth prospects of ICICI Prudential life ltd.

Wednesday, September 28, 2016

Conquest of Investing

Let us forget about markets for a moment and consider the following: prior to our age of market economies and capitalism, some other form of ‘capitalism’ existed.
However this capitalism was not based on creating wealth through progress in all spheres of society and the production and distribution of goods and services, but through conquest (the acquisition of territories and wealth by force – so called unfriendly takeovers).
From our schooldays we all remember the incredible military achievements of conquerors such as Cyrus the Great (559-530 BC), Alexander the Great (356-323 BC), Julius Caesar (100-44 BC), Charlemagne (AD 742-814), Umar ibn al-Khattab (586-644), Genghis Khan (1167-1225), and much later, Napoleon Bonaparte (1769-1821).

Their empires were in steep bull trends for a while… but eventually (frequently after the conqueror’s death) toppled like a house of cards… the great conquerors of antiquity were the first ‘businessmen’ to make extensive use of leverage. Their armies never grew much in terms of size, but the territories they controlled expanded almost exponentially. As a result, the acquired empire grew disproportionately per unit of soldier…
But one victor after another led to euphoria, carelessness, and total misjudgement of risks. While most great military leaders were careful not to waste their armies at the beginning of their careers, they later fell victim to their own success and began to neglect the risks associated with the conquest of larger and larger territories (the acquisition of additional assets).Take, for instance, Napoleon. 
The Russian campaign of 1812 was from a risk
 point of view, a complete absurdity (it was an incredibly leveraged, high –risk low-reward transaction, typical of the terminal or climactic phase of an empire’s uptrend)…
Markets are no different from empires. They expand, rise in value, become ever-extended, and eventually collapse. In a modern market economy, conquerors are business leaders (Promoters of Businesses) , successful speculators, adventurous fund managers and leverage buyout artists.
The Army Generals are their immediate subordinates like CEOs & Board members (ambitious junior partners among hedge funds, Fund Managers, research prima donnas, etc) who are all sharing in the profits of their ‘conquerors’ and Business Media houses who makes money by telecasting these conquests . Finally the soldiers are the individual investors – usually uninformed, greedy, and displaying strong crowd behaviour [psychology] and rapid changes of sentiment.

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