Investment Shastra

ICICI Lombard IPO – Stretched Valuation; Taking advantage of Euphoria

Issue Date: Sep 15, 2017 – Sep 19, 2017

Face Value: INR 10 per equity share

Issue Type: Book Built Issue IPO

Issue Size:Offer for Sale of 8,62,40,000 shares

Issue Size: INR 5,700 Cr.

Price Band: INR Rs 651 – 661 per equity share

Market Lot: 22 Shares approx

Minimum Order Quantity: 22 Shares

Listing at: BSE, NSE

About the company

ICICI Lombard General Insurance Company Limited largest private‐sector non‐life insurer in India based on gross direct premium income in fiscal 2017. Incorporated in 2000, ICICI Lombard General Insurance Company Ltd founded as a joint venture between with ICICI Bank Limited and Fairfax Holdings Canada.

It offers customers a range of products, including motor, health, crop/weather, fire, personal accident, marine, engineering and liability insurance, through multiple distribution channels. In fiscal 2017, the company issued approximately 17.7 million policies and their gross direct premium income was Rs.107.25 billion, translating into a market share, on a gross direct premium income basis, of 8.4% among all non‐life insurers in India and 18.0% among private‐sector non‐life insurers in India.

MoneyWorks 4me Opinion

We like General insurance business in India more than Life insurance business.  We like it due to traditional products and growth in the business is more structural and sustainable than Life insurance.

Penetration of General insurance has been low vs even emerging market peers; 0.77% in India as compared to 1.8% in China, 1.7% in Thailand, 1.7% in Singapore, 1.6% in Malaysia and a global average of 2.8%. There is no doubt that potential is huge and it will definitely scale up. Investors often get carried away looking at just upside. But its matter of time which is difficult to gauge. It may happen 10% CAGR over 20 years which is not so great or it may happen 25% CAGR over 8 years. We believe it will be somewhere between the two and mostly inclined towards the former trajectory.

ICICI Lombard has got good penetration in Auto insurance, own damage as well as third party damage. Auto insurance has gained scale due to regulatory norms. However, rest of the insurance products are still at their nascent stage.

Fundamentals of ICICI Lombard are decent if not great. ROEs are consistent even if Combined ratio are not very impressive. But with scale, combined ratios would improve. We like the company and have been valuing it at the time of valuation of ICICI Bank.

While we agree with all the positives of General Insurance, we do not believe valuations are anywhere close to fair. General Insurance is a cyclical business. ROEs fall down when investment income goes down due to fall in equity and debt markets and diseconomies of scale due to higher fixed cost. Competition is high and gestation period for general insurance is low. This will attract more players thereby leading pressure on pricing.

We believe the right way to value General Insurance is using cross cycle earnings to compute average ROE and then using appropriate PB Ratio. Current valuations demand 7.7X Price to book value and 47X Price to earnings ratio. Even if we factor in 15% CAGR in book value growth over 10 years, issue price is 2X Price to book value of 10th Year Book value.

On basis of stretched valuation, we recommend AVOID.

According to our estimates, fair value of the company lies between Rs. 300-380/share. We have often seen that a particular sector becoming favorite of the market and new listings take advantage of it to list at premium valuations. We are cautious on entire financial space as it underestimates risk of business model and we believe its not the right time to get aggressive at such peak valuations. Its better if you trim down your NBFC holdings.

As lot of hands are chasing handful of stocks, IPO issues may experience rapid increase in share price in short term. You may wish to ‘speculate’ with a small capital.

But as an advisor, our duty to inform you what is right and refrain you from risk taking behaviour in this market. We will definitely recommend you select issues which are worth investing. We are equally interested in making money as you are!

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