Reblog: New India Assurance IPO Review
The New India Assurance Company is entering the primary market on Wednesday 1st November 2017 with an IPO of up to 12 crore equity shares of Rs. 5 each, comprising fresh issue of upto 2.40 crore equity shares and an offer for sale (OFS) of 9.60 crore equity shares by promoter Indian Government, both in the price band of Rs.770 to Rs. 800 per share, with Rs. 30 per share discount for retail investors. Representing 14.56% of the post issue paid-up share capital, issue will raise Rs. 9,474 crore, at the upper end, of which, Rs. 1,895 crore will flow into the company via fresh issue and balance Rs. 7,579 crore will meet FY18 divestment target of Rs. 72,500 crore. Issue will close on Friday 3rd November and listing is expected on 13thNovember.
New India Assurance, 99.99% subsidiary of Government of India, is the country’s largest general insurance company, with 15% market share (down from FY16’s 15.7%) in gross direct premium, enjoying leadership in all segments, such as motor, health, fire, marine, except crop. In FY17, motor, health, fire, marine, crop segments accounted for 39%, 26%, 15%, 3% and 5% of company’s gross written premium, respectively, which is more-or-less in line with the industry structure, except for crop insurance where all private sector insurers have been more aggressive. Company has a robust pan India multi-channel distribution network, comprising 2,452 offices, 68,389 agents, 16 corporate agents, 25 bancassurance partners (including Bank of India and Canara Bank), with individual agents, direct sales and brokers accounting for 42%, 31% and 26% of business respectively.
Company’s gross written premiums have grown at 15% CAGR between FY13-17 to Rs. 23,230 crore, but net profit growth has actually been stagnant, infact bottomline has declined in this period, from Rs. 914 crore in FY13 to Rs. 840 crore in FY17. One may argue that net profit is not the true reflection of the health of an insurance company, but from stock market point of view, it is tracked each quarter and becomes relevant for retail shareholders. Leaving bottomline aside, even operating profit has been negative for past 4 years, out of last 5 years, which signals weak fundamental position.
FY17 consolidated revenue from operations stood at Rs. 20,554 crore, up 16% YoY, with similar growth in premium earned of Rs. 17,675 crore. Operationally, it reported loss of Rs. 900 crore, up from FY16’s operating loss of Rs. 533 crore. In a year when general insurance industry has benefitted due to PM crop insurance scheme (as seen in FY17 financials of both ICICI Lombard and GIC Re), New India seems to have been left out, and its FY17 consolidated PAT declined to Rs. 840 crore, from Rs. 930 crore YoY, leading to an EPS of Rs.10.72 on bonus-cum-split adjusted equity of Rs. 400 crore (FV Rs. 5 each). Dividend of Rs. 250 crore has been paid for FY17, which leads to payout ratio of 36% including distribution tax. Company is required to pay annual dividend of 30% of PAT or 30% of Government of India’s equity, whichever is higher. However, dividend theme is not relevant for this stock, as yield is less than 1%, unlike some other PSUs.
In Q1FY18 however, company seems to be getting its mojo back, although it is surprising to see such a ‘sudden’ turnaround from a public sector enterprise just before the IPO. June quarter gross written premium stood at Rs. 6,390 crore, revenue from operations Rs. 5,590 crore and operating profit rose to Rs. 178 crore. On June quarter, net profit of Rs. 513 crore, EPS stands at Rs. 6.41, on expanded equity via 1:1 bonus and FV split to 5 from 10. Company’s solvency ratio of 2.22x as of 31-3-17 and 2.27x as of 30-6-17, versus IRDA’s requirement of 1.50x, are healthy. As of 30-6-17, net worth stood at Rs. 13,124 crore, which translates into BVPS of Rs. 164. Post IPO, book value will increase to about Rs. 200 per share, as of 31-3-18. Govt’s shareholding in the company will decline to 85.44%, post listing. Fresh issue proceeds of Rs. 1,895 crore will be used to meet future capital requirements and well as improve solvency ratio.
Operation performance vis-à-vis listed peer:
|Particulars||New India||ICICI Lombard||Remarks|
|Gross Written Premium (FY17)||Rs. 23,230 cr||Rs. 10,725 cr||New India has maintained its leadership, although has been losing market share of late.|
|Market Share (FY17)||15.0%||8.4%|
|Solvency Ratio (latest)||2.3x||2.2x||Both strong as IRDA requirement of minimum 1.5x|
|Combined ratio (Q1FY18)||110.66%||102.4%||New India’s operating expenses ratio is lower than ICICIGI but claim loss ratio is much higher, leading to high combined ratio.|
|Claim settlement (within 1 month) ratio||78%||94%||Being a private sector player, ICICIGI has better focus on customer service.|
|Share of Equity in Investment assets||3.4%||9.7%||Lower share of equity investments limits scope for higher investment income and hence profitability|
|PAT (FY17)||Rs. 840 crore||Rs. 642 crore||Despite half the market share, ICICIGI earns more profits|
|RoE (FY17)||6.81%||20.3%||New India’s RoE is nearly one-third of the largest private sector peer|
|RoE (avg of FY15-17)||10.1%||19.3%||Return ratio indicates declining trend in the past 3 years|
New India’s combined ratio, a vital operating matrix in insurance, is very high at 111% which means insurance business has been loss making. Since FY13, this ratio has been hovering in the range of 116-120%. Even if we exclude the technical reserves, which the company maintains is on account of legacy issues, being in business for almost a century and if one is not able to make core operations profitable, then something is seriously flawed! On other operational aspects too, such as profitability, return ratio and claims, New India lags its private sector peer, the sole general insurer in Indian stock markets.
At Rs. 800 per share, company’s market cap will be Rs. 65,920 crore, implying PE and PBV multiples of 75x and 4.9x respectively, on historic basis. Based on FY18E earnings, PE and PBV multiples are 32x and 4.0x respectively. Calculating net worth after accounting for fair value changes may not be appropriate, as it considers unrealised gains, which can fluctuate vastly. Sole listed general insurer ICICI Lombard, with consistent and growing financials, demonstrates higher fundamental strength, and is trading at PE of 39x and PBV of 6.7x, on FY18E. New India valuation may be cheaper, but the business is on a weaker footing versus listed peer, and hence the valuation discount is not appealing enough. The retail discount of less than 4% is also not very attractive.
Even on market cap to premium ratio, New India stands at 2.8x as compared to 2.9x for ICICI Lombard, which is barely any discount due to the relative weakness highlighted in the above table. Thus, both on peer comparison as well as weak fundamentals, valuation of New India Assurance appears demanding. Recent muted listing of all insurance players (ICICI Lombard, SBI Life as well as GIC Re), with last two still ruling below issue price will also have cautious rub-off on this issue. Coming from the Govt. stable, atleast New India could have done a better job with respect to pricing, in order to boost investor confidence and market sentiment!
Although sector growth and market leadership position favour the company, depleting market share, lower return ratio and poor profitability go against it. Drawing parallels from PSU banks, New India also lacks the hunger for growth, which is demonstrated by its private sector peers, which is what investors are looking out for today.
To cut a long story short, weak fundamentals and unattractive pricing make this IPO an avoid.
The original review is penned by Geetanjali Kedia, appears on sptulsian.com and is available here.