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Explained: LIC’s shares are trading at a discount — but here’s why you should not look at listing gains alone

LIC IPO Listing: Analysts say LIC is a good long-term investment, and will do well when the market recovers and stability returns to the economy.

Written by George Mathew , Edited by Explained Desk | Mumbai |
Updated: May 18, 2022 3:32:35 am
Life Insurance Corporation (LIC) Chairperson M R Kumar (R) with Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey rings the bell during the listing ceremony of LIC at the Bombay Stock Exchange, in Mumbai, Tuesday, May 17, 2022.(PTI Photo/Shashank Parade)

On Tuesday (May 17), shares of Life Insurance Corporation (LIC) started trading at Rs 867.20 – at a discount of 8.62 per cent – on the BSE as against the issue price of Rs 949 per share, disappointing investors. The share was trading at Rs 880.50, a discount of 7.22 per cent, at 2.30 pm IST even as the volatile stock markets staged a rally, with the Sensex jumping nearly 1,190 points, or 2.25 per cent, intra-day.

LIC IPO: Is the LIC share overpriced?

Despite gloomy market sentiments, the LIC offer got a good response with better-than-expected subscription figures led by strong demand from retail policyholders, retail investors, and employees of the insurer.

LIC policyholders and retail investors who got shares at a discounted price of Rs 889 and Rs 904 per share respectively, also saw an erosion in the value of shares on the first day of trading.

“There’s a general perception in the market that LIC should have offered some money on the table for investors on the listing day. They should have at least priced the share at the lower end of the IPO range – Rs 902 per share of the IPO range of Rs 902-949. It would have given some confidence and made the share attractive for investors,” an analyst with an investment firm said.

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The 8 per cent-plus discount on the listing day has disappointed investors who expected some premium on the first day of trading. However, a section of the market remains optimistic.

“LIC is a long-term player in the insurance sector and investors should not look at listing gains alone. Any opportunity to add LIC at a price lower than the IPO price should be used to invest more for the long term. There may be a bit of retail selling today due to the current sentiments in the overall market, but the long-term fundamentals of LIC remain intact,” Girirajan Murugan, CEO of FundsIndia, said.

Did weak global markets impact the share?

Several analysts attributed the tepid response to LIC on the listing day to weak global markets in the wake of rising inflation, and a hike in interest rates by central banks around the world, including India. “The 8 per cent lower debut of LIC shares is a commentary on the current state of global markets rather than the company itself. In terms of subscription, the LIC IPO was extremely successful given the fact that it was the biggest IPO of India,” Mohit Ralhan, Managing Partner, TIW Capital Group, said.

Also, the domestic market has been hit by sell-offs by foreign portfolio investors (FPIs) who have remained net sellers in the financial year so far with outflows of around Rs 70,000 crore. With the US Federal Reserve and the RBI set to hike rates further to tame inflation, the market is likely to face further turbulence in the coming months. The Sensex has been volatile ever since the Russian invasion of Ukraine began in February, and oil and commodity prices started going up.

Should investors keep LIC shares?

Analysts say LIC is a good long-term investment, the weak debut on Monday notwithstanding. The listing price has fallen in tandem with the fall of insurance sector valuations, maintaining the discount of about 70 per cent to the industry’s average.

“We believe that LIC is a decent investment opportunity in the short to medium term, considering its strong market presence, improvement in future profitability due to changes in surplus distribution norms, and strong sector growth outlook. LIC can perform well when we have a bounce in the market and positive performance in the insurance sector,” said Vinod Nair, Head of Research at Geojit Financial Services.

The general view is that LIC shares will do well when the market recovers and stability returns to the economy and financial markets. “Once the dust settles on the market due to the ongoing issues related to the Ukraine-Russia war and the worries on the inflation front, stocks in the Insurance sector along with other beaten down stocks in the banking and NBFC space should see good momentum,” Murugan said.

Ralhan said: “LIC is a typical blue-chip company which is expected to give steady returns over a long period of time and therefore returns over a day is not relevant. It is expected to remain quite attractive for investors.”

What’s LIC’s position in the insurance sector?

With assets under management of over Rs 40 lakh crore, LIC is the largest financial institution in the country. It is also the largest investor in stock and debt markets in India, and holds sizable stakes in most Indian companies.

“LIC has a solid business, trusted brand, and market leadership in an underpenetrated insurance market. In FY-21, LIC’s market share was about 75 per cent for individual policies and 81 per cent for group policies. It is the top life insurance company by a wide margin,” Ralhan said.

The insurance industry in India is growing at an annual rate of about 15 per cent and the growth is expected to sustain over a long period of time given that insurance penetration in India is a meagre 3.2 per cent which tends to be more than 8 per cent for developed economies and it is about 5 per cent in China. With its strong financial base, LIC is expected to give decent returns to policyholders and investors in the coming years.

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