Your investment in UIC: Guided by an in-depth analysis or chasing the rumor?

-Dheerusha Tiwari

On 16^th April, 2018, United Insurance Company (UIC) proposed to issue 240% right shares to the shareholders. Just a day prior, news on UIC was published where Insurance Board took action against UIC and one of its schemes of fire insurance was halted. However, if we review the market depth of UIC, 29,969 quantity shares of UIC were demanded with 85 buy orders by 3 PM. Not even one single quantity of UIC stocks were supplied till 3:00 PM. This shows that UIC’s shares were on high demand. What these buyers of UIC scrips saw for the day was only the three digit number “240”% (in the proposed right shares) and what the buyers failed to see were three hidden truth of UIC:

a) Financial fundamentals of UIC,

b) Adjusted price of UIC, and

c) Insurance Board action against UIC,

Financial fundamentals of UIC:

Financial fundamentals are considered to be one of the most important aspects to be taken into account while investing in any shares. It wouldn’t be wrong to say the buyers of UIC blindfolded themselves as they bought the shares at a price around Rs 1100.

UIC has a paid up capital of Rs 30.24 crore. The company will meet a paid up capital of Rs 1.02 arba once the right share is adjusted. Even with Rs 30.24 crore paid up capital in hand, it would not be possible for UIC to distribute any bonus or right share to the investors for the year of 2074/75. The reason being its negative reserve and surplus.

UIC has a negative reserve of Rs 4.90 crores for the second quarter of FY 2074/75. The negative reserve is a major indicator that proves the company won’t be distributing any kind of return in the form of bonus shares and dividend even in the upcoming year.

Dear investor, are you investing in shares to get back nothing? Did you know the company you are investing in does not even hold a positive reserve?

So, it is of no doubt the right shares have been proposed simply to fulfill the requirement of paid up capital and shareholders will not benefit.

The company further has a net profit of Rs 4.06 crore in the second quarter of 2074/75 which is the third lowest among all the non-life insurance companies. This already makes the company not an appropriate investment.

Besides, the estimated net profit of the company for the fourth quarter is Rs 8crore. The paid up capital will be around Rs 1.02 crore. Given this, the EPS will stand at Rs 7.84. Thus, investors buying the scrips of UIC are spending Rs 403 per share to earn a return of Rs 7.84. The financial performance of the company clearly shows that the company does not have strong financials compared to other non-life insurance companies.

Dear investor, did you know all you will gain is an earning worth Rs 7.84 for a buying price of Rs 403?

b) Adjusted price of UIC

Every investor has an objective to invest in a share that maximizes its market price in the long run. However, the buyers of UIC are buying the shares around market price of 1131 without even realizing the price will fall down more than half of the purchase price i.e. Rs 403; once the right share of 240% is adjusted.

With the issuance of right stares, the number of listed shares will increase in the secondary market. As the supply of these share increases, will the after adjustment price remain Rs 403 at the provided level of EPS? The investors are entering the market with the hope that the price will keep on increasing however, if they fail to exit at the right time, all they will get is hold of shares with a lower market price.

Dear investor, what is your objective on each purchase- a sure shot profit or a guaranteed loss?

c) Insurance Board against UIC:

Investment motive of any rationale investor in a certain company should be backed up by the morale and principle followed by the company. However, when the regulator entity of a certain industry takes action against the bad deed of the company, it is quite clear where the company is not taking a right move.

 UIC is currently charged of illegally insuring promoter’s property and compensating more than the lost amount to its corporate clients. The insurance board has halted the company’s Agni Beema scheme under the same case two days ago. Further, the company was found compensating extra amount to parties such as EOL Pvt Ltd, CG Impex, CG Electronics. The extra amount is not a minor amount but rather a whooping amount of Rs 3.21 crore. Why would an insurance company want to compensate extra to its client? Why would an insurance company state claimed amount of Rs 34.18 crore as Rs 38.18 crore?

Dear investor, were you aware about the action that regulatory body undertook  against the company of your choice of investment?  

The investors did not simply fail to see the hidden truth in the financial statement, the exaggerated value of the company and the deceitful morale of the company but also several external factors involved with the issuance of right shares of UIC:

1. When the regulator body directed the BFIs to increase their paid up capital, it was quite evident that each and every insurance companies will either propose bonus shares or right shares. The process of distributing right and bonus share is not a fortnight task. It takes time, effort, legal requirements, approval, compliance with procedures and many more. UIC has just proposed its right share. The right share is not going to be transferred to the investor’s demat account overnight. It is yet to be followed by a series of procedure. For instance, the proposed right share issue is yet to be finalized after gaining approval from Insurance Board and the upcoming AGM of the insurance company. Besides, a rigorous approval process from ICRA, SEBON is a long way to go. And, finally, let us not forget, UIC yet has to choose its issue manager.

Dear investor, what is your urgency to grab the shares of UIC when the company has a long time to fulfill its requirements?

2. History is often regarded as the greatest teacher but why do Nepalese investors fail to learn every single time? API (API Power Company Limited) and EIC’s (Everest Insurance Company) shareholders went on a roller coaster ride, last year. The price hiked to its peak and then the price fell to the lowest possible point. The reason- it’s “proposed” right shares.

API Power Company Limited was the company to propose right shares of 200%. With this announcement, investors could see only the three big digits that read “200” and grabbed the company’s shares as if it would write a billionaire fate. However, after few months (March 18 and 19, 2018), the company was among the top losers that hit a negative circuit for two consecutive days. Besides, the most talked about scrip of the secondary market; Everest Insurance Company had proposed 600% right shares. The company had not even approved for the right shares but the investors demand for the company’s share increased in such an extent that the price reached around Rs 3000. However, within a week there was a 17% fall in the price of the scrip.

Dear investor, don’t you think the days are not far when UIC might bring the same fate that API and EIC scrips had brought?

The objective of maximizing wealth is very rationale among any normal investor but what is not rationale is being the “sheep in the herd”. Wealth of a rational investor is never attained with big digits on bonus shares and right shares. It is attained when investors know the motive behind their investment in a certain company.

The article is not a suggestion to investors on what they should do and what they should not. It is simply a summary of facts that investors should consider before investing in UIC. Each paragraph is further accompanied by questions that investors must ask themselves before making their investment decision. 

Dear investor, wishing you luck for the next investment you make.