PSU insurers see strong rally, stocks still far away from their issue price

Public sector undertaking (PSU) insurance companies have seen a very strong rally in the last 15 days. Stocks like New India Assurance and General Insurance Corporation of India (GIC Re) are trading at their highest levels in 52 weeks. Life Insurance Corporation of India (LIC) stock has also gained 10% in the last one week.

New India Assurance has moved up 17% on Friday (November 24), 38% in the last 7 days and as much as 53% in the last 15 days.

General Insurance Corporation of India (GIC Re) was also 13% up on Friday (November 24), 24% in last 7 days and 35% in last 15 days.

Insurance analysts said that there are no fundamental reasons for the rally in PSU insurance. Also, the financial results were largely disappointing but there are other ancillary factors which could bring the strong up move in the stocks of these PSU insurers, analysts told CNBC-TV18.

PSU insurers, without an exception, have very low public float. In New India Assurance, government holds 85%, while 9% is held by LIC and 1% by GIC Re, leaving just about 5% of public float. Similarly for GIC Re, 86% stake is held by government, LIC holds 9% stake leaving just 5% public float. For the largest life insurer-LIC, government holds 96.5% with just 3.5% public float.

Such stocks often show large moves on low volumes.

The Reserve Bank of India (RBI) last week increased the risk weights, or the capital that banks need to set aside for every loan disbursed. For banks and NBFCs, it was increased by 25% points to 125% on retail loans. This move from RBI led to some flow of funds from NBFC stock to other pockets of the market, insurance being one of them.

PSU insurance stocks also provide great degree of valuation comfort as compared to their private peers. LIC trades at 1.6X Price-to-Embedded Value, New India Assurance trades at 1.6X Price-to-Book Value and GIC Re trades at 1.5X Price-to-Book Value. This makes the PSU insurance stocks a relatively safer bet.

Despite the strong moves in these PSU insurance stocks, they are far away from their IPO or issue price. New India Assurance’s IPO price was ₹400 per share (1:1 bonus adjusted). New India Assurance has to double from here to reach its IPO price. GIC Re’s IPO price was ₹456 per share (1:1 bonus adjusted) which means the stock is still 34% away from its IPO price. LIC is also nearly 30% away to reach its IPO price of ₹949 per share