At the outset trying to analyze a company for its future potential in Nepal is not easy. Most of the time, analyzing a company is a tedious task, and that is with all the data available. But in Nepal, even that is difficult since data of each and every company is tough to find. There are Tools like SSpro from Sharesansar that have come out, which makes the analysis a lot less tedious, but it is not a luxury for everyone. I use it because it saves time. They have an ample amount of data on old companies, but I would love to see a lot more data on newer companies as well. Also, other types of data such as past P/E ratios, changes in Book Value and EPS over a period of time are not present, and I have to do it manually. But the software, I hope, will get better.
However, when it comes to new companies, the software is dumbfounded. For, e.g. the recent upcoming IPO of Nepal Reinsurance Company. It is probably one of the largest IPO issuances in the history of the Nepalese stock market, and yet the process of analyzing the company is very hard, to say the least. I wanted to write this article to help you understand how you can analyze a company as an individual and the different ways you can do it.
The things I will be discussing in this article are :
- What is a Reinsurance Company
- A short description of the Nepal Reinsurance company
- Analyzing a company(Nepal Reinsurance company)
- Various ways of analyzing a company for its investment potential in Nepal
What is a Reinsurance Company
To understand what a reinsurance company is, you have to think of other insurance companies as people. Just like you can take out insurance with a company like EIC (Everest Insurance Company). Similarly, an insurance company Like EIC can choose to take out an insurance policy from a reinsurance company.
Why do they do it? They do it to minimize or defer liabilities. Say for, e.g. you took out an insurance policy from EIC. Then in case, you make a claim, EIC is liable to pay you the insurance money you are owed. In that case, you are a liability to EIC. And why is that a problem? The simple answer is compound interest. The longer they can hold on to the premiums you pay, the larger their profits over time. But an individual is not a big concern for big companies like EIC. Problems arise for them during catastrophes. For, e.g. during the earthquake of 2015, insurance companies bled out a lot of money. To protect themselves from such a scenario, insurance companies like EIC and many Others insure themselves via a reinsurance company. (Who have an ample supply of money with vast reserves)
A short description of the Nepal Reinsurance company
Nepal reinsurance company is a government-backed company. It started its operation in Dec 2014. At the time the government stake in the company was 45%, and the rest was from Non-life insurance companies. Currently, the Government has a 43.6% stake while LIfe and Non-life insurance companies have 38.4% and 18.1% stake respectively. To know who all the stakeholders are, you can check out the link. Government stakes in a company mostly signify stability. But I would let you be the judge of that.
Nepal Reinsurance company is the first reinsurance company in Nepal with the current paid-up capital of 8.40 Arba. After the IPO issuance, the paid-up capital will go up to 10 Arba. i.e. it is about to float 16 million units at a par value of Rs 100. This is probably the largest in the history of our country. ICRA Nepal Limited has assigned an [ICRANP] IPO Grade 2 to the Rs.1.60 Arba Initial Public Offer of Nepal Re-Insurance Company Limited. And considering that most Hydropower IPO issuances get a [ICRANP] gade of 4 and 4+ at best. I would say 2 is an excellent rating. Although I would warn you that the grade given is not a clear indication of how good the company will do in the future.
Analyze a company (Nepal Reinsurance company)
As per the recent annual report of the company, the total profit of the company stands at 1,007 Million, with total shares outstanding of about 50 Million. The EPS stood at 20.11, which grew from 13.37 in the previous year. Since the asking price of Rs.100 is only 5 times that of the EPS, the investment can be considered a safe investment. That means the P/E ratio is only 5. (A good average P/E ratio in Nepal is between 10-20; hence a P/E ratio of 5 can be considered cheap). This means for every 5 Rs. you invest in buying the shares you can hope to make 1 Rs. in return the very next year (This is of course Not taking into consideration the change in EPS in the most recent quarter due to the lack of data). Recently Nepal Reinsurance Company has reported a total profit of Rs 1.17 Arba for Q4 of FY 2075/76. This is why I think that at 100, the IPO is a steal if the company can generate similar profits in the future.
There is always a question of how the company will do in the future. That’s a speculation that has to be made on an individual level after looking at the numbers. But if you see the financial reports of the company from 2015-16 to 2018-19, there have been a few ups and downs. But despite that, the company has done very well for itself. For a more in-depth analysis, I would advise you to go through the reports. Use the ideas we have discussed in the previous articles. I would personally buy the IPO and put my money in it, but that is my decision. This article was written just to give you an idea of how to quickly evaluate a company. But there are a lot of other factors that have played a role in my decision. Hence, you might come to a different conclusion depending on your risk tolerance. Due to the lack of data IPO’s are always a riskier choice. It’s always better to fall on your own sword, and I am willing to fall on mine.
Various ways of analyzing a company for its investment potential in Nepal
As you can see from the analysis above, analyzing a company individually is a tedious process. This process of analyzing a company for its investment potential is a lot harder in Nepal than it should be. We don’t have websites like MSN Money or Yahoo Finance to quickly evaluate companies with all their history right in front of us.
We have websites likeSharesansar and Merolagani, who I believe are doing there best and evolving their platforms to better assist the average investor. Both of them have their own portfolio management tools that you can subscribe to. It helps to keep track of your all investments and provide a lot of information so that you can make an intelligent choice. (No, I am not a sponsor)
I personally use the SSPRO Tool from Sharesansar. It Costs Rs.3500 annually. The reason why I pay that much is because it helps me to do a quick analysis of the companies I am interested in buying without having to check out individual financial reports. And the important thing is that the financial ratios are easy to find and makes the whole process a lot more efficient. (Meaning I don’t have to do tedious math)
If you don’t want to pay the cash, then there is an easy way to access all that data. Sharesansar, in particular, has been trying to incorporate a new section in the financial reports section of the individual companies. There you can quickly look at companies’ balance sheets, their profit, and loss account (income statement) and their cash flow statement along with their respective financial ratios like the ones we talked about in the previous articles. However, you may not find data for all the companies you are looking for.
But the area where I think the analysis tools are lagging behind has got to do with the new companies. There are fewer data available to analyze an IPO, and the updates are not fast enough. But kudos to the improvement that is being made. So for now if you need to evaluate a new company, you should go to their respective websites and study the reports manually. If you can’t find the reports on their websites, then you are probably better off not investing in them at all.
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P.S. This is not an endorsement. I am writing this article to give you a taste of what it’s like to be an investor in this country. I cannot stress this enough, please make your own decisions by looking at the numbers.