GIC Re IPO opens today: Go for long-term subscription, say analysts

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Mumbai: Analysts are upbeat about state-owned General Insurance Corporation of India Ltd’s (GIC Re) Rs11,372 crore initial public offer (IPO) opening on Wednesday, India’s second-largest IPO ever. Brokerages said improving operating metrics, continued traction from agriculture business and decent valuations are positives.

The largest IPO in India remains state-owned Coal India Ltd’s Rs15,200 crore share sale in 2010.

The GIC Re IPO will see the state-owned insurance firm issue shares in a price band of Rs855-912 apiece, valuing it at Rs75,000-80,000 crore. The offer closes on Friday.

Some analysts recommend investing only from a long-term perspective, given the full valuations.

In a note on Tuesday, brokerage firm Prabhudas Lilladher Pvt. Ltd said that the GIC Re IPO’s price band of Rs885-912 per share implies a valuation of 25.7-27.4 times on March 2017 EPS (earnings per share), which it believes is a fair price.

“RoE (return on equity) is also expected to remain good in the range of 15-18% on high investment income and better operating efficiency. The company too has robust payout ratio; hence, we recommend subscribing for long-term gains,” Prabhudas Lilladher analysts said in the note.

GIC Re is the largest reinsurance company in India in terms of gross premiums received in fiscal year 2017 and accounted for around 60% of the premiums ceded by Indian insurers to reinsurers during the fiscal year.

The company offers reinsurance services in key businesses such as fire (property), marine, motor, engineering, agriculture, aviation, health, liability, credit and financial liability, and life insurance.

According to Reliance Securities, given its undisputed leadership position in India, GIC Re is expected to continue its healthy performance, as the reinsurance market is expected to reach Rs700 billion by fiscal year 2022.

The sharp growth in agriculture gross premiums is likely to be a major growth trigger for the company’s business. GIC Re’s gross premiums in the agriculture reinsurance segment have increased more than 14 times since fiscal year 2015 to Rs9,752.3 crore in fiscal year 2017.

In its draft prospectus filed in August, the company said it estimated its then exposure to India agriculture sector is over 50% of the overall insured risk.

“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,” Reliance Securities analyst Asutosh Kumar Mishra said in a note on Tuesday, while recommending investors to subscribe to the GIC Re IPO.

Reliance Securities said it believes GIC Re’s valuations of 4 times P/B (price to book) of fiscal year 2017 and 26.6 times diluted earnings of fiscal year 2017 at upper price band appear reasonable and attractive compared with ICICI Lombard General Insurance Co. Ltd’s P/B of 8.1 times and 46.7 times earnings despite generating same quantum of return on equity.

Angel Broking said agriculture gross premium has grown sharply over the last three years largely due to the initiatives taken by the government and it contributed 29% of gross premium in FY17, against 4% in FY14.

That said, weather-related risks to this growth based on agriculture were not ruled out.

“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,” Angel Broking analyst Jaikishan J. Parmar said in a note on Tuesday.

“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 Parmar.