GIC IPO Recommendations: Analysts see profits

General Insurance Corporation IPO (GIC IPO) opens today for subscription as the first IPO by a reinsurance player in India. Aiming to mobilize INR11,372.64 crore, the IPO will be the third biggest public offer in India. Retail investors are looking forward to it as they will get a discount of INR45 per share on the price band of INR855 – 912 per share. There is no anchor book but the GIC IPO recommendations are mostly positive with no concerns over valuations. Here is a snapshot of GIC IPO recommendations.

Noting the company’s diversified investment portfolio and strong profitability, Ashika Stock Broking has put a subscribe rating on the IPO. “On the valuation front, at the higher price band of Rs. 912, the issue is priced at P/E of 25.5x FY17 post issue EPS. (According to the management, the company has price-to-book value of 1.5-1.6 times as compared to global average of 1.0-1.5 times, while the price-to-earnings is 24 times as compared to global average of 45 to 50 times.) Thus, the issue appears to be attractively priced considering strong financial track record, healthy balance sheet and bright prospects of the overall general insurance sector in the future. Hence, we recommend our investors to “SUBSCRIBE” the issue from a medium to long term perspective,” said its report on the IPO.

Angel Broking also has a positive rating on GIC IPO while cautioning that poor monsoon can create problems for the company in future. “At the upper end of the IPO price band it is offered at 25x its FY2017 EPS and 4x its FY2017 book value (Pre-IPO). The agriculture GP (gross premium) has grown aggressively over the last 3 years largely due to the initiatives taken by the Government and it contributed 29% of GP in FY2017 (4% in FY2014). However, the financials of the company may get affected adversely if India witnesses bad monsoon or successive poor monsoon seasons, drought, flooding or other catastrophic events impacting the Indian agriculture industry. Nonetheless, positives such as leadership position, well managed investment book, robust balance sheet and reasonable valuations provide comfort, hence, we recommend SUBSCRIBE on this Issue,” said the brokerage house in its report.

Prabhudas Lilladher expects the company’s return ratios to remain good in future and thus, it has put a subscribe rating on the IPO. “It enjoys strong capital position with solvency ratio of 2.4x. The promoters are coming out with an offer for sale of around Rs98bn and fresh issue of Rs15.7bn with dilution of 14.2% at a price range of Rs885‐912. At the upper band of Rs912, the company trades at 27.4x Mar‐17 EPS which we believe is fairly priced, but given the liquidity in the markets and company’s performance in the recent past, we recommend to Subscribe for long term gains,” analysts noted in the IPO note.

Read Also: GIC IPO Review: Insurer of Insurance companies

Sushil Finance is also among the brokerage houses having positive GIC IPO recommendations. “GIC Re doesn’t have domestic peers. However, when compared to global peers, it has the lowest net expense ratio of 18.53% and highest net investment yield of 12.34% as of 2016- 2017. Foreign currency exchange risk does not affect the company materially. Furthermore Global giants such as Swiss Re and Munich Re are also eyeing the Indian Market and it gives us confidence that this is a sun-rise industry,” said the company. The brokerage house advices investors to stay invested for the long time, “Given the dominant position of the company and the positive outlook for the growth of the insurance, and hence the reinsurance sector in India, we suggest the investors to subscribe for this issue and stay invested for the medium to long term.”

Subscribe is the word from Reliance Securities as well. “Given the undisputed leadership position in India (~60% market share), GIC Re is expected to continue its healthy performance, as re-insurance market is expected to reach at Rs700bn by FY22E (~14% CAGR over FY17-FY22E). Though GIC Re does not have any comparable peer in India, it stands forth among similar global players in terms of premium growth, net expense ratio and investment yield. Looking ahead, we expect its business to get further traction on the back of increasing awareness among farmers about Fasal Bima Yojana as this segment has consistently been growing at rapid pace for last two years. We believe valuations of 4x P/B of FY17 and 26.6x diluted earnings of FY17 at upper price band appear reasonable and attractive compared with ICICI Lombard’s P/B of 8.1x and 46.7x PE despite generating same quantum RoE. Thus, we recommend SUBSCRIBE to the Issue,” said the research report outlining the positives.

Without putting a recommendation, Arihant Capital Markets conferred a “4 star” rating on the IPO. “The issue has been offered in a price band of Rs 855-912 per equity share. At the upper price band of Rs 912 the stock is available at P/BV of 1.6(x) and P/E of 23(x) based on FY17 EPS. There are no listed reinsurance companies in India. Accordingly, it is not possible to provide an industry comparison in relation to the Corporation. Based on qualitative pointers, robust past growth and future potential, above mentioned strengths and management quality we have “4 star” rating for the issue,” said analysts in their IPO note.

IIFL expects things to get better for the biggest reinsurance player in India. “Gross premium growth for GIC Re should remain sturdy in the coming years owing to a) sustained brisk growth in Indian non‐life insurance industry b) expanding reinsurance market in India and c) tapping of new global markets including the largest ones. The potent combo of likely inroads into global market along with better pricing in domestic market should further improve the combined ratio in the medium term, save for any untoward loss. At the IPO price of Rs912, GIC Re is reasonably valued at 3.6x P/BV on a post money basis. The valuation, inclusive of Fair Value Change Account (FVCA), drops to 1.5x P/BV. We recommend Subscribe,” noted IIFL’s research report.

Analysts are clearly bullish on the prospects of the reinsurance company and positive GIC IPO recommendations are testimony to this. The retail discount of INR45 per share further increases the attractiveness of the IPO. To get an idea how bullish are fellow readers, head to our discussion page for the IPO.