DALAL STREET REVIEW (CUT-PASTE)
IPO rating – 52 (Investment recommended)
About the offer
The offer by GIC includes fresh issue of 1.72cr shares and offer for sale of 10.75cr shares. The shares will be issued in the price band of Rs 855-912 and the minimum lot size is 16 shares. Investors will be required to put in minimum investment in the range of Rs. 13,680-Rs. 14,592.
The issue will remain open from Oct 11 to Oct 13. The company is offering retail investors and company’s employees discount of Rs 45 per share. This implies the company will raise ~Rs.1568cr through fresh issue and Rs.9804cr through OFS on the higher price band. This aggregates the issue size to Rs11,372cr.
The face value of the share is Rs 5. The company will be listed on both NSE and BSE.
The lead managers of the IPO are Axis Capital, Citigroup Global Markets, Duetsche Equities India, HSBC Securities and Kotak Mahindra Capital Company.
Purpose of the IPO
From OFS, the company will not receive any money.
From the fresh issue of Rs1568cr, the company plans to use the proceeds to augment its capital base and for other corporate expenses.
About GIC
GIC is a public sector company and is the largest reinsurer in India and is ranked as the 12th largest reinsurer in the world by CRISIL. GIC accounted for 60% of the non-life insurance premiums ceded in FY17.
The company has exposure to India and international business. In FY17, reinsurance written for risks outside of India represented 30.53% of gross premiums.
The gross premium mix of the business is shifting towards India, with India/ International ratio of 69.4%/30.53% in FY17 vs 56.7%/43.2% in FY16. We can see that the total consolidated gross premiums increased at a CAGR of 48.6% over FY15-17 as compared to international gross premium which increased at a slower CAGR of 24.84% over FY15-17.
The growth in the company''s India business was also triggered by crop insurance as agriculture gross premium witnessed a huge spike comprising 28.39% in FY17 vs 6.82% in FY16. We see new opportunities in this segment gaining traction with government impetus on providing crop insurance instead of farm waivers going forward. Another segment which has been a resilient sector is motor insurance.
Financial performance
We see that gross premium on consolidated basis grew at a CAGR of 48.65% over FY15-17 to Rs.33741 cr. The company has been working towards improving its operational efficiency. We also believe that growth in premium and better utilisation resulted in lower operating expense ratio to 0.83% in FY17 vs 1.18% in FY15.
We also see that solvency ratio lowered to 2.4x in FY17 vs 3.3x in FY15. This would require company to augment its capital base as the solvency lowered further to 1.8x in Q1FY18 and they are required to maintain solvency of 1.5x.
Particulars (Rs-Cr)
2017
2016
2015
CAGR
Gross Premium
33,741
18,534
15,270
48.65%
PBT
3,417
3,021
2,831
6.50%
PAT
3,140.6
2,823.4
2,891.0
4.23%
Operating Expenses/ Net premiums
0.83%
1.15%
1.18%
0.33%
Industry overview
Reinsurance market for non-life insurance is on the higher side than life insurance due to the ticket size and lower pure life insurance products (more of protection plus growth). Hence, non-life insurance accounts for ~95% of the reinsurance business.
According to CRISIL Research, Indian reinsurance market was ~Rs.388 bn in FY17 and grew at a healthy 15% CAGR from FY07-17. In FY17, the premiums in non-insurance grew due to sharp increase in crop insurance (4 times), and even excluding the category, the growth was at a healthy 18%.
Private non-life insurance dominates the market and accounts for 48% of the reinsurance market, while public sector insurance accounts for 33%. With reinsurance, fire, motor and health account for 27%, 18% and 12%, respectively, of the non-life insurance in FY16.
The growth of reinsurance market is dependent on the growth of primary non-life insurance. The direct premium for non-life insurers is estimated to increase at 15-20% CAGR over FY17- 22. Consequently, reinsurance premiums are expected to grow at 11-14% CAGR over the same period.
Valuation and outlook
GIC does not have any direct listed peers. However, GIC has seen a significant improvement in performance in FY17. Also, since management is looking at inorganic growth and also eyeing opportunities in international life reinsurance, we expect the company to continue its growth. However, we believe the company can improve its operational efficiency further.
Also, we see the valuation to be decent compared to ICICI Lombard''s, which is trading at P/B of 8.1x. Though ICICI Lombard is not a direct peer, it provides a good proxy for comparison.
Companies
P/B
GIC
4.0x
ICICI Lombard
8.1x
Our view
We urge investors to subscribe to the issue as we see the company improving its performance going forward. On the financial performance, we see that the company has benefited from government schemes and seen a good traction in crop insurance, which is under-penetrated and offers scope for growth. Also, considering the discount for retail investors of Rs.45 and the pipeline of general insurance companies IPOs, we expect it to lead to new price discovery.
*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
Zerodha (Trading Account)
RHP
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