Profit-led rally in GIC may fizzle out sans turnaround in underwriting biz

Unless the underwriting business starts looking up, brokerages are reluctant to give a buy call on the stock despite the recent rally

After being a big laggard for more than four years since its initial public offer, public sector firm General Insurance Corporation (GIC) has now started to outperform the broader market. Its stock price was up 8.8 per cent on Wednesday compared to a 0.23 per cent rise in the benchmark BSE Sensex during the day.

The stock has now rallied 29 per cent in the last one and half months against a 3.2 per cent rise in the Sensex during the period. Thanks to its recent rally, GIC is now up 13.6 per cent since the start of the current calendar compared to 7.6 per cent rise in the benchmark index during the period.

This ended years of a poor show by GIC at the bourses since its listing on October 25, 2017. The re-insurer had listed at a share price and market capitalisation of Rs 435.2 and Rs 76,351 crore, respectively. However, there was a steady decline in the GIC stock price and market capitalisation post-listing, thanks to its poor financial performance. In February this year, GIC fell to a record low of Rs 111 while its market capitalisation had plummeted to Rs 19,465 crore, down nearly 76 per cent from its adjusted IPO price of Rs 456 a share.

A rally in the GIC stock price in the past six months has helped long-term investors recover a part of their losses, but the stock needs a bigger rally to fully compensate for its poor show in the previous four years.

The numbers suggest that the recent rally in the stock has been driven by a strong rebound in its earnings in the last three quarters. The company's quarterly consolidated net profit on trailing 12-months (TTM) basis is up 182.3 per cent in the last three-quarters. Its TTM net profit jumped to Rs 5,024 crore during the 12 months ended September this year, up from Rs 1,779 crore during the 12 months ended December 2021.

The company’s stock price, however, is up only 14 per cent during the period leading to steady decline in GIC valuations on price to earnings multiple basis. Its trailing P/E multiple declined from 13.9x at the end of December 2021 to 5.6x currently, among the lowest in the financial services and insurance space.

Given this scenario, the current price movement in GIC is a catch-up rally and the stock price adjusts to a rise in its earnings. But many analysts question the sustainability of the rally given the continued stagnation in its revenues and the company’s inability to increase its underwriting business.

"GIC reported a large beat on profit in Q2FY22 led by investment income with booking of capital gains on equity book. The company faces growth headwinds in domestic books due to primary insurers' demand of reducing obligatory reinsurance on motor/health and new crop treaties with more manageable 80-110 per cent loss corridor," analysts at JP Morgan India write in their recent report on the insurer.

As the county's top reinsurer, GIC provides re-insurance cover to general insurance companies and compensate them if they book extreme losses.

GIC inability to grow shows in its top line. GIC's net sales or the underwriting fee was down 3.5 per cent YoY in Q2FY23 on trailing 12-months basis and was nearly 16 per cent lower than its record high TTM net sales of Rs 44,351 crore reported during 12-months ending March 20 quarter.

Unless there is a turnaround in GIC underwriting business, brokerages are reluctant to give a buy call on the stock despite the recent rally.