SELL on New India Assurance - COR improves - HDFC Securities

Mr. Madhukar Ladha, Institutional Research Analyst, HDFC Securities

NIACL is India's largest insurer but continues to make high underwriting losses. We note that the company's competitive positioning is weakening and remain concerned about its ability to write profitable business. We estimate an FY22E adj. ROE of just 5.9% and can, at best, assign a valuation of just 0.7x FY22E ABV (less 10% discount for an additional 10.4% supply). We rate NIACL a SELL with a target price of Rs 100.

1QFY21 highlights: (1) NWP at Rs 68.3bn (+7.2/8.1% YoY/QoQ) was slightly ahead of estimates (+2.1% vs. estimates) as fire/health posted healthy growth of +20.8/22.6% YoY. NWP (ex. crop) grew 6.7% YoY to Rs 67.9bn. NEP grew 11.3/-1.4% YoY/QoQ to Rs 60.6bn. Share of Fire/Health in GWP improved 618/1250bps YoY to 23.0/40.9%, while motor OD and TP shed 230/767bps YoY to 11.0/13.8% as the lockdown hit new motor vehicle sales and old policy renewals.

Led by lower claims ratios in Motor and health, 1QFY21 ICR/COR improved meaningfully to 65.9/101.6% (-2,640/-1,390bps YoY). Investment income (net of provisions) was at Rs 8.6bn (-42.0/-37.7% YoY/QoQ). Yield incl. FV change was at 28.6% as equity markets bounced back.

The company reported CAT losses of Rs 1.5bn on account of cyclones Nisarga and Amphan. NIACL also provided an additional Rs 5.39bn in respect of increased pension liabilities resulting from lower interest rates. It reported an APAT to Rs 4.2bn ( +12.9/30.4% YoY/QoQ).

Outlook: We expect FY21E to be a muted year in terms of NEP growth (FY21E: 4.6% YoY); however, given the lockdown and partial re-open conditions and lower economic activity, loss ratios in most lines (except health) are expected to improve. Health loss ratios may get impacted adversely if the COVID-19 pandemic is not arrested.

Shares of The New India Assurance Company Ltd was last trading in BSE at Rs.118.85 as compared to the previous close of Rs. 116.15. The total number of shares traded during the day was 96916 in over 2195 trades.

The stock hit an intraday high of Rs. 121.65 and intraday low of 117.2. The net turnover during the day was Rs. 11506665.

Source : Equity Bulls

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