ICICI Lombard IPO opens today: Valuation a bother, but analysts recommend long-term subscription
Mumbai: Although analysts are upbeat about the prospects of general insurer ICICI Lombard General Insurance Co. Ltd’s initial public offering (IPO), some have concerns that the offering to raise up to Rs5,700 crore may have been steeply priced.
The ICICI Lombard IPO, a pure offer for sale, will see ICICI Bank and Fairfax Financial Holdings Ltd sell around 86.24 million shares. The initial share sale values the firm at Rs30,000 crore at the upper end of the price band of Rs651-661 per share. The issue opens on Friday and closes on Tuesday.
The IPO valuation is a significant mark-up from the valuation of Rs20,300 crore in May, when Fairfax sold a 12.18% stake to a bunch of buyers, including private equity firm Warburg Pincus. The sale fetched Fairfax around $383 million (around Rs2,372.5 crore then).
“We are positive on ICICIL (ICICI Lombard) for long term as non-life Insurance sector in India provide huge opportunities for growth due to significantly lower penetration and lower insurance density compared to other developed and emerging economies,” Motilal Oswal Securities Ltd said in a note.
ICICI Lombard is the largest private insurance firm with 8.4% market share on gross direct premium income (GDPI) basis among all non-life insurers in India. It holds 18.0% share among private sector non-life insurers in the country, and manages Rs164.5 billion of investment assets.
“While the valuation looks higher compared to other listed financial companies, we believe premium valuations are justified in context of huge growth potentials of non-life segment, leadership positioning, strong solvency margins and consistent return on equities (ROE),” Motilal Oswal analyst Yogesh Hotwani said. The brokerage recommended subscribing to the issue with a long-term perspective.
According to brokerage firm Prabhudas Lilladher Pvt. Ltd, ICICI Lombard IPO’s price band of Rs651-661 implies a valuation of 45.8-46.5 times on March 2017 earnings per share (EPS) which, the brokerage believes is fairly priced.
“RoE is also expected to remain strong in the range of 18-20% 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 added.
The concerns that valuations are stretched seem to be bothering most analysts alike.
“There is not much left on the table for the investors as far as the pricing is concerned. There may not be scope for huge listing gains,” Ravi Sundar Muthukrishnan, head (institutional equities research) at Elara Securities Pvt. Ltd.
“For life insurance companies, embedded value is used as a relevant valuation measure, which is prescribed by the regulator. Whereas in the case of general insurance companies, since it is not prescribed, earnings—based multiples are being used, which may not reflect the true value of the stock,” Muthukrishnan added.
Embedded value is a valuation measure, mostly specific to the insurance industry, and is calculated by adding the adjusted net asset value and the present value of future profits of a firm.
ICICI Lombard General Insurance is the second insurance company from the ICICI group to go public. Last year, ICICI Prudential Life Insurance Co. Ltd raised Rs6,000 crore in an initial share sale, the first public offering by an Indian life insurer.
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