ICICI Lombard

IPO Snapshot:

ICICI Lombard General Insurance is entering the primary market on Friday 15^th September 2017 with an offer for sale (OFS) of upto 8.62 crore equity shares of Rs. 10 each by promoter ICICI Bank (37% of OFS) and ex-promoter Canadian Fairfax Corp (63% of OFS), in the price band of Rs.651 to Rs. 661 per share. 5% of the issue, representing 43 lakh shares, is reserved for ICICI Bank shareholders. Representing 19% of the post issue paid-up share capital, total issue size is Rs. 5,700 crore, at the upper end. Issue will close on Tuesday 19^th September and listing is expected on 27^th September.

Company Overview:

ICICI Lombard General Insurance, India’s largest private sector non-life insurer based on FY17 Gross Direct Premium Income (GDPI) of Rs. 10,725 crore and 18% market share among the private sector players (who together constitute 42% of the non-life market) and 10% market share among all non-life insurers, is the first non-life insurance company to get listed in India. Promoted 15 years ago by ICICI Bank with Prem Watsa controlled Fairfax (latter ceased to be promoter now), ICICI Lombard also has the highest investment assets of Rs. 16,446 crore among private sector non-life insurers in India, of which a high proportion of 15% is invested in listed equities. Broad product split is motor 42%, crop/weather 20%, health/personal accident 20% and fire 7%, with the company ranking first in all the product categories among private multi-product general insurers, since FY15. Its distribution channel is well diversified between individual agents (12% of business), corporate agents (14%), brokers (31%) and direct reach (43%).

Financials:

Company’s financials have been ramping up steadily, with big push coming from crop insurance since FY17 onwards, due to Pradhan Mantri Fasal Bima Yojana’s launch in April 2016. Between FY13-17, company’s revenue from operations have grown at a 12% CAGR to Rs. 7,180 crore, while operating profit has risen at a CAGR of 22% to Rs.667 crore in FY17. Since brought forward losses got exhausted in FY16, net profit growth was little lower, at CAGR of 16%, leading to FY17 net profit of Rs. 642 crore. Currently company pays near-full tax rates. On equity of Rs. 451 crore, EPS for FY17 stood at Rs. 14.25.  

For Q1FY18, company’s financial performance has been excellent. Revenue from operations rose 14% YoY to Rs. 1,882 crore, while operating profit surged 56% YoY to Rs. 192 crore. Net profit of Rs. 214 crore translated into 66% YoY increase, leading to EPS of Rs. 4.73 for the first quarter. As of 30-6-17, company’s networth stood at Rs. 3,919 crore, translating to BVPS of Rs. 87. Currently, ICICI Bank holds 62.92% stake in the company, which will shrink to 55.92% post IPO. Fairfax’s stake will decline from 21.91% to 9.91% (below the regulatory prescribed 10%). In May 2017, a clutch of financial investors such as Warburg Pincus (9.01%), Singapore’s Tamarind Cap (1.59%), IIFL Fund (1.71%) bought 12.18% stake in the company, via secondary purchase from Fairfax, at approximately Rs.450 per share, valuing the business at close to Rs. 20,000 crore.  

Business parameters and stacking vis-à-vis peers:

• Company’s combined ratio and loss ratio, lower the better, are on a downward trajectory, declining to 102.4% and 78.1% respectively, as of 30-6-17, from 104.1% and 80.6% on 31-3-17. However, the combined ratio is still highest compared to other top private non-life insurers – Bajaj Allianz 97%, HDFC Ergo 100.7%, IFFCO Tokio 102.9% (for FY17). ICICI’s loss ratio is also higher than many peers – Bajaj Allianz 70.4%, HDFC Ergo 76.2% and Tata AIG 72.3%. This depicts scope for improvement.    
• Its solvency margin of 2.13x is quite strong, vis-à-vis IRDA prescribed minimum threshold of 1.5x.
• FY17 RoE of Rs. 20.3% is also healthy, as it is among the top 3 in the pecking order. IFFCO Tokio tops the private players with 29%, followed by Bajaj Allianz 23%, but HDFC Ergo’s 19.2% RoE trails ICICI Lombard closely.
• Customer servicing: While its claim settlement time (within 1 month) of 94.4% is the highest, it’s claim ratio as a % of policies sold is also high, at 12.4%, versus average of 10.6% for top 5 private general insurers. 

Thus, in terms of operational parameters, it’s a mixed bag for this leader.

Valuations:

At Rs 661, company’s market cap will be Rs. 30,000 crore, which discounts the FY17 earnings by a PE multiple of 46x and FY18E earnings by 36x. Based on expected BVPS of Rs. 100, as of 31-3-18, the PBV multiple is 6.6x, and 5.5x on FY19E. On the face of it as well as in relation to other NBFC stocks, these valuation multiples are very steep. Bajaj Finserv, with presence in retail lending and both life and non-life insurance businesses, is ruling at PBV of 5x, newly listed Aditya Birla Capital with lending, life insurance and asset management verticals, is quoting at PBV multiple of 3.4x, while M&M Finance with rural lending book of over Rs. 40,000 crore for auto and tractor financing, is trading at PBV multiple of 3x, all on FY18E book.

Even in relation to the last transaction price, it is a huge 50% premium, with the transaction been undertaken barely 4 months ago, with the same seller Fairfax. Current IPO is also 100% secondary in nature, without a single penny flowing into the company. However, following positives favour the issue:

1. Company enjoys strong leadership position – based on GDPI, it has held on to the numero uno position among the private sector non-life insurance companies since past 13 years (i.e. since FY04)! Also among each product category i.e. motor, health, crop, fire, marine, engineering, it is the leader among the private sector non-life insurance companies since FY15.
2. Strong brand and pedigree - With promoter ICICI Bank being classified by RBI as ‘too big to fail’ for second successive year, it will have positive rub-off as a brand, on ICICI Lombard General Insurance.
3. Track record - ICICI Prudential Life made its debut, as first life insurer to list in India, exactly a year ago. From the issue price, stock has delivered 29% return till date, in the past one year, which will again weigh positively on this offering form the same group.
4. Sector growth – India’s general insurance market is highly under-penetrated. Rising urbanisation and affluence, to act as catalysts for the market to continue its double digit growth and hence benefit the company.
5. First mover advantage – Since the company is the first pure-play opportunity in the high growth non-life insurance space to list in India, it may enjoy premium valuations, on expected large appetite for the issue, led by both domestic and foreign institutional money.  

Thus, issue is pricey, but it enjoys distinct advantages in terms of operations, financials and brand recall.

Conclusion:

Although valuations are steep, company’s strong leadership position, consistent track record and sector growth trajectory make the issue a subscribe, with potential to deliver 20% annual returns, over the long term.

Disclosure: No Interest.