Corporation of India Limited (GIC Re’s) initial public offer (IPO) opens today for subscription. The company aims to garner over Rs 11,000 crore. The price band has been fixed at Rs 855 - Rs 912 per share
. The IPO would be India's third biggest ever, after Coal India's Rs 15,200 crore and Reliance Power's Rs 11,700 crore issues.
The IPO consists of an offer for sale (OFS) of 10.75 crore shares (12.5% stake pre-issue) worth Rs 9,804 crore at the higher price band and a fresh issue of 1.72 crore shares worth Rs 1,569 crore. The amount raised from the fresh issue will be used for augmenting the capital base to support future business growth and to maintain current solvency levels.
GIC Re is the largest reinsurance company in India in terms of gross premiums accepted in fiscal 2017. The company, according to CRISIL Research, accounted for nearly 60% of the premiums ceded by Indian insurers to reinsurers in FY17.
Should you subscribe to the IPO? This is what leading brokerages and research houses across the country suggest:
GIC Re showed strong net premium growth at 73% YoY mainly led by four‐fold jump in crop insurance
premium collections in FY17 due to the implementation of Pradhan Mantri Fasal Bima Yojana (PMFBY) scheme whereas fire insurance
continues to grow stable at ~23%. GIC Re does not look to increase third party motor business and health group business which has historically had high losses and has not been a profitable business line. At the upper band of Rs 912, 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.
The issue appears fairly priced considering a return ratio of ~16% RoE and PAT CAGR of mere 5.7% over FY13-17. On other parameters, GIC has healthy financials with Incurred Claims ratio of 81.6%, combined ratio of 100.2% and solvency ratio of 2.41x as on Mar’17. GIC being a leading reinsurer in India with ~60% market share, could continue to see a stable growth, going ahead. However, given the full valuation
and size of the issue (one of the biggest IPOs in last few years), the stock is expected to give returns only in the long term.
As on 1QFY2018, GIC Re had an investment book worth Rs 41,930 crore carrying value (Rs 73,903 crore Market value) on which company has been able to generate yield of 12.3% for FY17. The agriculture gross premium
has grown aggressively over the last three years, largely due to the initiatives taken by the Government and it contributed 29% of gross premiums in FY17 (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 subscribing to this issue.
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 Rs 912, 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.
Given the undisputed leadership position in India (~60% market share), GIC Re is expected to continue its healthy performance (~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.