New India Assurance IPO analysis

IPO rating - 39*

About the issue

The New India Assurance Company is coming with an IPO to raise Rs. 10,560 crore through fresh issue of 2.4 crore shares and offer for sale of 9.6 crore shares. The offers will remain open from November 1 to 3, 2017. The shares will be issued in the price band of Rs. 770-880 crore and retail investors and eligible employees will be given a discount of Rs. 30 per share. The face value of the share is Rs. 5. One would need capital of Rs. 15,840 to subscribe for the issue as the minimum lot size if 18 units. The lead book runners for the issue are Axis Bank, IDFC bank, Kotak Mahindra Capital, Nomura and Yes Bank. 

With this IPO, the company will be listed on both NSE and BSE. 

Purpose of the issue

At the lower end of the price band, the company will raise ~Rs. 1,848 crore. The funds will be used to meet the IPO-related expenses and for future growth and expansion in FY18. 

The company has a current solvency ratio of 2.27 which is above the IRDA requirement of 1.5. The company plans to utilize the funds to also maintain or improve this ratio post the expansion plans. 

About New India Insurance 

New India Assurance is a leader in the general insurance category, with a market share of 19.1%, 21.9%, 29.6%, 18.2%, 21.0%, 15.1% and 18.4% of total gross direct premium from segments fire, engineering, aviation, liability, marine, motor and health insurance, respectively. We see that the company enjoyed an overall market share of 15% in FY17 and stands at number one position in the category. However, its market share has marginally diminished from FY15 from 15.6% to 15% in FY17. This could be largely driven by slipping in the market share in fire insurance (largest  category in general insurance industry) from 20.4% in FY15 to 19.1% in FY17. However, the company has been able to grow its standing in the motor insurance sector. 

The company has witnessed a CAGR of 15.18% in  gross written premium over FY13-17 which was almost in-line with non-life insurance industry growth of 15% CAGR over FY11-16. In FY17, its gross written premium stands at Rs. 23,230.5 crore. Also, its claims settlement ratio in FY17 improved to 96.51% from 95.8% in FY15. Motor and health contributes ~64% to the gross written premium followed by fire, other, crop and marine. The company offers approx. 230 products under these business segments. 

The company has about 2,452 offices in India in all states and union territories. It has a robust distribution network with 68,389 agents and 16 corporate agents along with tie-ups with banks and automotive OEMs and dealers. The direct channel of agents contributes ~42% to the business, followed by 25.75% from brokers. Being a PSU, the company also partners with state and central government for implementation of various insurance schemes. 

Company's gross written premium increased at a CAGR of 15.18% and networth increased at a CAGR of 7% over FY13 to FY17. Gross direct premium per employee increased from Rs 62.7 lakh in FY13 to Rs 122.6 lakh in FY17. Also, operating expense ratio was 20.40% in FY17 which is lowest among the top 10 multi-product insurers in India. 
  
The company intends to focus on high growth retail health sector, innovative products for miscellaneous segments including cyber liability, title insurance for immovable property and unorganized commercial sector. 

Financial performance

The company has been able to grow the gross premium written at ~15% CAGR over FY15-17. However, the company has been making operating losses in miscellaneous insurance segment since last five years which are eating up the profits from the marine business. Also, we note that profit before tax has declined from Rs. 1697 crore in FY15 to Rs. 926.3 crore in FY17. Consequently, PAT has also declined from Rs 1374 crore in FY15 to Rs. 819crore in FY17. 

Valuation

Company’s P/B on the lower band for the offer is at ~4.5x which is lower that ICICI Lombard P/B of 7.63x. However, New India assurance RoNW is at 6.3x while ICICI Lombard is ~14x. 

Our view

Non-life insurance sector is expected to grow at a steady pace of 15-8% CAGR. We see that New India Assurance being a market leader in the segment will benefit from the same. However, we see that rising claims and declining profitability doesn’t augur well for the company. We see that the company is still dependent on direct sales channel for 60% of the premium collected and has a high dependency on the state of Maharashtra. Though the P/B of 4.5x is below its only listed peer ICICI Lombard, we see the performance is way below ICICI Lombard which has seen CAGR growth of 25% over the last 5 years.

Hence, we recommend avoid on this IPO. 


*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment

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