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.
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