New India Assurance IPO Review: When leaders falter

Insurance sector is currently red hot with several of them tapping the primary market and the latest in the series is New India Assurance which is coming up with its IPO on 1 November. The company, owned by the government of India, has priced the public offer in the range of INR770 – 800 per share, although retail investors and eligible employees will get a discount of INR30 per share. A total of 120,000,000 shares will be sold in the public offer through a mix of fresh shares and an Offer For Sale (OFS). In total, the IPO will mobilize INR9,600 crore at the upper end of the price band, valuing the company at INR65,934 crore. Nevertheless, the strong of flop insurance sector IPOs have turned investors cautious and being a PSU has lost its advantage after the poor show of General Insurance Corporation (GIC). We dive deeper in New India Assurance IPO review to see if the offer leaves something on the table for investors.

New India Assurance IPO Review: Less fresh, more OFS

Like most IPOs this year, New India Assurance IPO will be a mix of fresh shares and a sale by existing shareholder (which is none other than the President of India). The company plans to raise up to INR1,920 crore by issuing new shares and these funds are proposed to be used towards meeting future capital requirements, expansion of business, improving solvency margin and solvency ratio. The company had solvency ratio of 2.27 as of 30 June 2017, against 1.5 required by the IRDAI.

Read Also: Mahindra Logistics IPO review: Asset-light logistics

A bigger chunk of INR7,680 crore will be mobilized by the government which plans to sell 96,000,000 shares. The company was incorporated in 1919 and the government’s cost of acquisition of these shares is nil!

New India Assurance IPO Review: You name it, they have it

Incorporated in 1919, New India Assurance is the largest general insurance company in India on several parameters such as net worth, domestic gross direct premium, profit after tax and number of branches. The company offers insurance products in key business verticals such as fire insurance, marine insurance, motor insurance, crop insurance and health insurance.

As of 31 March 2017, it had issued 27.10 million policies across all product segments, the highest among all general insurance companies in India. As of 30 June 2017, its operations were spread across 29 States and seven Union Territories in India and across 28 other countries globally through a number of international branches, agency offices and subsidiaries including a desk at Lloyd’s, the world’s largest specialist insurer.

Its insurance products can be broadly categorized into the following product verticals: fire insurance; marine insurance, motor insurance, crop insurance, health insurance and other insurance products. In Fiscal 2017, its gross direct premium from fire, engineering, aviation, liability, marine, motor and health insurance represented a market share of 19.1%, 21.9%, 29.6%, 18.2%, 21.0%, 15.1% and 18.4%, respectively, of total gross direct premium in these segments in India, and it was the market leader in each such product segment.

New India Assurance IPO Review: Topsy turvy financial performance

New India Assurance’s financial performance has been pretty strong as the following table illustrates. Revenues growth has maintained a steady pace and the top line of INR20,471 crore simply puts it in the leadership position. This has been made possible as a result of its long history and extensive network. Nevertheless, there are significant changes in the way the company is generating revenues. The share of individual agents fell from 49.86% in FY2015 to 41.83% in Q1 FY2018. In the same timeframe, share of brokers grew from 25.35% to 34.70%, indicating a higher concentration on corporate insurance.

Unlike revenues which have been following the upward trajectory, profits have been uneven. In fact, the company’s FY2017 profits were the lowest levels in the last five years. In insurance, profitability is always uncertain and it goes for a toss if claims surge in a year. This has been the case with New India Assurance which saw claims spiking in the last two years in fire and miscellaneous business lines.

New India Assurance IPO Review: Should you invest?

From what we have seen so far, the company is in a good position of market leadership. The company’s gross written premium increased at a compound annual growth rate of 15.18% from INR13,200.18 crore in FY2013 to INR23,230.49 crore in FY2017. With more awareness, we can expect the insurance pie to grow in future.

Read Also: Government paves way for PSU general insurance IPO

A cause of concern is the rising competition in the industry which is taking away market share from the old PSU insurers. Although New India Assurance is still leader in most market segments, emergence of private players like ICICI Lombard has caused market share erosion for New India Assurance. Being a PSU, the company also increased wages which played a part in lower profit in the last two years. As one can expect, margins of New India Assurance are on the lower side when compared with ICICI Lombard which listed earlier this year at a discount. New India Assurance’s productivity of INR8.6 million per employee in contrast to ICICI Lombard’s INR16.6 million is another indication of the vast gap between PSU and private sector insurance players.

Without a doubt, these factors are going to play an important part in valuations which should be at a discount to its only listed peer. The company’s Earnings Per Share (EPS) stood at INR10.72 in FY2017 which puts the price band (INR770 – 800 per share) in the Price/Earnings (P/E) range of 71.83 – 74.63. For reference, ICICI Lombard currently trades at P/E ratio range of 47-48. Margins are better in the first quarter, thanks to revision in pricing of some policies and retail investors will also get some comfort in the discount of INR30 per share. However, we will discount the first quarter performance to remove seasonality-related factors, although premium revision is a solid step. In other important valuation metrics, its Return on Net Worth (RONW) of 6.81% is also on the lower side compared to ICICI Lombard’s 17.82%. Net Asset Value (NAV) of INR157.46 per share means Price/Book Value (P/BV) ratio is 4.89 – 5.08 which is lower than its peer’s comparable trading multiple of 8.

Even though the general insurance leader has strong fundamentals, New India Assurance IPO review tells us the pricing should have been saner considering its lower profitability, PSU drags, and eroding market share. In light of the poor show of insurance IPOs so far, New India Assurance could have done a better job of pricing the offer in line with realities. As things stand, this appears to be for high-risk takers. Nevertheless, check out our discussion page on New India Assurance to see what other investors have to say about the IPO.