New India Assurance IPO opens today: Analysts neutral over valuation concerns

New India Assurance, country's largest general insurance company, has opened its initial public offer (IPO) for subscription today. The Rs 9,600-crore IPO will close on November 3.

Around 12 crore shares or 14.13 percent stake of the insurer will be sold through the share sale offer in a price band of Rs 770 -Rs 800 per share. The government will sell 9.6 crore shares in the state-owned insurer besides a fresh issue of 2.4 crore shares.  Retail investors and employees will get a Rs 30 discount on the price of a share.

Axis Capital, Yes Securities, Nomura Financial Advisory and Securities (India) Pvt Ltd, IDFC Bank and Kotak Mahindra Capital Company are managing NIA's IPO.

Analysts are largely neutral on the issue citing valuation concerns.

Under applicable IRDAI regulations, control level solvency ratio of 1.50 is required to be maintained. As of March 31, 2017, the insurer's solvency ratio was 2.22.  The solvency ratio is the ratio of the excess of assets over liabilities to the required capital.

In fiscal 2015, 2016 and 2017, the insurer's gross written premium was Rs  16,986.59 crore , Rs  19,227.26 crore and Rs 23,230.49 crore, respectively. The firm's gross written premium increased at a CAGR of 15.18% from Rs 13,200.18 crore in fiscal 2013 to Rs 232,30.49 crore in fiscal 2017.

Its net worth (excluding fair value change account) increased from Rs  9,605.03 crore as of March 31, 2013 to Rs 12,596.44 crore as of March 31, 2017, while its total net worth (including fair value change account) increased from Rs  25,469.81 crore as of March 31, 2013 to Rs  36,298.08 crore as of March 31, 2017.

We look at what different brokerages have to say about the IPO.

ICICI Securities

The brokerage has recommended 'Subscribe' from a long-term view. Despite increasing competition from private players, New India remains a market leader. Net earned premium growth remains healthy. Improved penetration in motor insurance to boost growth.

Geojit Financial
Recommends 'Subscribe' for the long term.  The state-owned firm is a well-established general insurer in India and a diversified product offering. It has significant growth opportunities in the key segments such as motor, health as well as crop insurance.

Choice Broking

Despite being a market leader, the operating metric and financial performance of the company is not encouraging and it has reported operating losses in four out of five years. "Going forward, due to its dominant market position, the company would benefit from the growth in the industry and favorable government policies. Improvement in the operating performance of the health and motor insurance will be one of the key factors which will be keenly watched by the investors. However, it would take some time to materialize. Thus considering the above observations, we assign a "Subscribe with Caution" rating for the issue. We feel that that the investors can enter in this script at a lower price post listing and can hold it for a long period for better returns," noted the Mumbai-based brokerage house.

Angel Broking

Angel Broking cited the company's high combined ratio behind the low profitability. "At the upper price band of `800 the issue is offered at 5x FY2017 book value and 76x FY2017 EPS. Its listed peer ICICI Lombard is trading at 8x FY2017 book value and 48 times FY2017 EPS. ICICI Lombard reported decent ROE of 17% and average ROE for last 5 years is 19%, while NIA reported subdued ROE of 7% for FY2017 and average ROE of 9%. NIA's combined ratio is consistently higher than 115%, which is impacting the profitability of the company. Considering the subdued ROE, inconsistent PAT and higher combined ratio, we recommend NEUTRAL rating on the issue," said the broking form in its IPO note. The company has a subdued return on equity, inconsistent profit after tax as well as higher combined ratio. Though New India is market leader in terms of gross direct premium, it reports loss in the insurance business. Declining interest rates would impact interest income on debt investments, it said.

GEPL Capital

GEPL Capital has assigned a  'subscribe rating' on New India Assurance IPO, although it believes the insurance player demands a discount to its domestic peers. "The New India Assurance 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," said GEPL Capital's research report.