Analysts give thumbs up to New India Assurance IPO

New India Assurance IPO

India’s largest general insurance company New India Assurance Company Limited’s (NIA) IPO that opens for subscription on Wednesday as a part of the Government’s disinvestment programme for this fiscal has received ‘subscribe’ recommendations from several broking houses.

The company, which operates in 28 countries, is the only Indian direct insurance company to be rated as ‘A’ excellent by International Rating Agency.

New India Assurance has the largest market share of 15% of Gross Direct Premium among General Insurers in India, as per a CRISIL Report. Despite significant competition, the company has maintained its pole position in the Indian general insurance market. It has increased their market share in terms of Gross Direct Premium from 14.7% in Fiscal 2012 to 15% in Fiscal 2017.

Broking houses like ICICI Securities, Ashika Brokingand GEPL Capital has given a thumbs up to the issue and have come up with a subscribe rating report. GEPL Capital’s note states, “NIA stands to gain from operating leverage. At a P/BV of 2.4xs of FY17 book value. We believe that NIA demands a discount to its domestic peers. We assign a Subscribe rating to the IPO.”

ICICI Securities in its IPO note states, “Being slightly expensive with high combined ratios, we believe one should subscribe only from a longer term view and not for the purpose of accruing listing gains.”

Ashika Broking in its note mentions, “Its P/B including fair change account is 1.6xand excluding fair change account is 4.3x. Its only listed peer ICICI Lombard is quoting at a P/E of 38x and at a P/B of 7.2x including fair change account and 7.5x excluding fair change account. Thus, the issue appears to be fully priced. The sector looks attractive going forward. CRISIL forecasts the gross direct premium for general insurers to grow at a CAGR of 15-20% over the next 5 years. Considering all these aspects, we recommend our investors to “SUBSCRIBE” the issue from a long term perspective, as the company justifies premium valuation given its market leadership in general insurance category and bright prospects of the overall general insurance sector in the future.”

As of June 30, 2017, NIA had 68,389 agents, 16 corporate agents, 25 bancassurance partners and 2452 offices in India. It also has a presence across 28 other countries through a number of international branches, agency offices and subsidiaries. Net worth (excluding fair value change account) increased from Rs. 9605 crore in FY13 to Rs. 12596 crore in FY17. The company commands robust financial position with solvency ratio as of 2.27x (June 2017) compared to IRDAI requirement of 1.50x

Mr. Arun Kejriwal, Founder, KRIS Research says, “General insurance companies are valued at price to book and New India compares very favorably with its listed peer. In terms of premium earned it is almost three times its peer. Further with the increase in fair value not routed through the income statement, there is a certain amount of understated profits as well. Investment in New India is recommended for the long term.”

Even if one looks at price to earnings it should be noted that the income statement of NIA doesn’t reflect the true earnings of the company as the increase in fair value change is not routed through the income statement. This can be volatile but over a period of time keeps increasing. For example the NIA’s fair value change account increased from 15,867 Cr in FY13 to 23,701 Cr in FY17. This represents the unrealised gains on the equity portfolio arising out of mark to market and belongs to shareholders though it is shown separately in the balance sheet. This entire increase in fair value has not been passed through income statement. On a normalised basis this works out to about 1,950 Cr per year. Using earnings in income statement as a basis significantly understates the true earnings of the company and inflates the P/E ratio.

The New India Assurance Company Limited
Symbol NIACL
Issue Period 01-Nov-2017 to 03-Nov-2017
Post issue Modification Period 04-Nov-2017 and 06-Nov-2017 (10.00 A.M. to 1.00 P.M.)
Issue Size Initial Public offer of upto 120,000,000 Equity Shares
Issue Type 100% Book Building
Price Range Rs 770 to Rs 800
Discount Rs 30 per equity share to Retail and Eligible Employee Category
Face Value Rs 5
Tick Size Re 1
Bid Lot 18 Equity Shares and in multiples thereof
Minimum Order Quantity 18 Equity Shares
Maximum Subscription Amount for Retail Investor Rs. 2,00,000