Reduce Go Digit Ltd for the Target Rs 270 by Emkay Global Financial Services Ltd
We upgrade Go Digit to REDUCE from Sell due to the limited downside, while cutting Jun-27E TP by ~7% to Rs270 from Rs290. Go Digit reported a weak set of numbers, with GWP at Rs27.3bn declining 8% YoY (owing to aggressive competitive dynamics) and the claims and combined ratio, basis IGAAP or Ind AS, worsening by ~2-3ppts. To reflect the 1Q developments and industry dynamics, we revise our FY27-29 estimates which leads to a ~3-5% cut in GWP, minor increase in combined ratio, and slight reduction in PAT. However, given the industry’s competitive dynamics across multiple segments and GODIGIT’s high opex model, we still prefer to wait for a better opportunity to turn positive.
Industry dynamics lead to weaker growth and profitability
GWP at Rs27.3bn declined 8% YoY and was below our estimate of Rs29.9bn. Net Retention Ratio at 76.7% increased by 11.3ppts yoy, higher than our estimate, leading to NWP at Rs20.9bn (+7% yoy). NEP at Rs20.0bn increased 7.6% yoy and was 4.9% higher than our estimate. Claims ratio at 73.3% increased by 300bps yoy and was better than our estimate of 74%. The increase in claims ratio was driven by higher claims in Motor OD and one large claim in the fire segment. Expense Ratio, including Commission at 39%, was 70bps higher yoy and 3ppts higher than our estimate. Resultantly, CoR at 112.4% increased by 370bps YoY and was 240bps higher than our estimate. PAT at Rs0.86bn declined 38% YoY and was lower than our estimate of Rs1.48bn.
Management confident of its deep expertise and prudent practise
Despite the weak performance in 1Q, Management remained confident of its deeper understanding of the multi-line general insurance business and prudent practises. Against such a backdrop, the company did not see the need to provide additional Motor TP reserves amid the impact from the Jun-26 Supreme Court ruling (Shishupal case). Also, the management clearly stated that their business strategy is to act prudently and is not contingent on any external developments, including Motor TP tariff hike. For a deeper, long-lasting, and mutually beneficial relationship with reinsurers, the company underwrites business on gross loss ratio basis.
Downward revision in estimates; upgrade to REDUCE on limited downside
To reflect the 1Q developments and prevailing industry dynamics, we revised down our FY27-29 estimates which leads to
1) ~3-5% cut in GWP
2) 0.5-0.7ppts increase in combined ratio
3) ~2-3% cut in PAT. Against this backdrop, we cut Jun-27E TP by ~7% to Rs270 from Rs 290, implying FY28E PER of 30x (on IGAAP). We upgrade the stock to REDUCE from Sell, as after a long period of underperformance, the downside on fair-value basis is limited. However, we do not change our view to positive, as we see the current industry dynamics making it difficult for GODIGIT to deliver impressive growth with profitability; we await a better opportunity to turn positive.
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