India’s largest financial institution, Life Insurance Corporation (LIC), which manages around Rs 40 lakh crore of public money, has been listed on the stock exchanges with a Rs 21,000 crore initial public offering (IPO).
LIC IPO: How is the IPO priced?
LIC on Wednesday priced its IPO, the largest in the history of the capital market despite a reduction in size, at Rs 902-949 per share. LIC has offered a discount of Rs 60 for policyholders and Rs 45 for retail investors and employees. The IPO will open on May 4 and close on May 9.
The government will sell 22.13 crore shares through the offering. The anchor book will open on May 2, and the issue will open for retail investors two days later. Investors can bid in multiples of 15 shares. The size of the IPO was cut from Rs 65,000 crore to Rs 21,000 crore as the Russian invasion of Ukraine and sustained selling by foreign portfolio investors (a net of Rs 1,48,078 crore since the beginning of December 2021) affected the stock markets.
How should investors view the issue?
A couple of leading mutual fund managers said the reduction in valuation has made the issue attractive. “While there is a lot of inherent strength in the company and there are growth prospects, the valuations too seem fine now after the revisions. As the market is not witnessing a mad bull run that was being seen over the last year, there is a possibility that investors may not get immediate listing gains. But it will generate decent returns over the next three to four years,” a leading fund manager said.
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“There is a lot of strength in the company. There are many categories where LIC is not present on the business front, and so there is a lot of scope for it to explore these and grow. As LIC had a monopoly, one can only lose market share from such a position. It is, however, important to note that the company still maintains around a 60% market share and it could be a good company to invest with a medium- to long-term view,” said another fund manager.
Some see the listing as part of a strategic vision of the government aimed at long-term value creation for shareholders. “Our take is that we won’t be able to determine the true value in the case of LIC as it is a very big entity in itself. There are two ways to look at it: one in the present case where everyone is buying policies to safeguard themselves from uncertainties… second, due to huge buying power in the hands of consumers, the margins might reduce. One can subscribe with a long-term perspective,” said Manoj Dalmia, founder and director, Proficient Equities Limited.
How does the valuation compare with that of other insurers?
Yash Gupta, analyst at Angel One Ltd, said that at the offer band, the IPO is valued at a Price/Embedded Value (P/EV) of 1.06-1.1 on its September 2021 EV of Rs 539,686 crore, which is at a significant discount compared to the P/EV for listed private life insurance companies. HDFC Life Insurance is trading at a P/EV of 3.9, SBI Life at 3.2, and ICICI Pru Life at 2.5 on their respective December 21 EVs.
“Although LIC valuations appear to be cheap compared to listed private players, investors need to keep in mind that LIC has a lower VNB margin (value of new business) of 9.9% in FY2021 compared to private players that have VNB margins of 22-27% due to higher share of participation and group products. Despite lower margins and inferior business mix, we believe that the IPO is being priced reasonably and offers value to investors with a long-term view,” Gupta said.
There is, however, a section of the market that is not fully convinced about the valuation. “The ongoing volatility in stock markets due to the Russia-Ukraine war has forced the government to cut the issue size to 3.5%. However, the price band is kept on the higher side, which is not an attractive price for adequate return growth. We recommend that investors may subscribe for listing day gains and wait for lower levels for long-term investment,” said Ravi Singh, Vice-President and Head of Research, ShareIndia.
Tuhin Kanta Pandey, Secretary, Department of Investment and Public Asset Management, said, “This is a fair and attractive valuation… We want to champion LIC as a long-term value creator in the equity markets.” He said the issue is right-sized considering the capital market environment and will not crowd out capital and monetary supply even under the current constraints.
How big is LIC?
LIC, formed by merging and nationalising 245 private life insurance companies on September 1, 1956, with an initial capital of Rs 5 crore, now manages around Rs 40 lakh crore assets. It is the fifth largest life insurer globally and the largest asset manager in the country. As on December 31, 2021, it covered 91% of all districts and had 1.33 million individual agents, and had a market share of 61.6% in terms of premiums or GWP, 61.4% in terms of New Business Premium, 71.8% in terms of number of individual policies issued, and 88.8% in terms of number of group policies.
What are the advantages of listing?
LIC’s profile will get a boost. Investors can trade in its shares or keep them long-term. LIC will become more transparent and answerable to shareholders for any mismanagement. It will have to follow the listing guidelines of stock exchanges and SEBI regulations.
While Pandey has ruled out a follow-on issue in the current financial year, markets are expecting more offers in the next financial year. Moreover, the insurtech industry will benefit. “Most of the public insurers in the country were still evaluating digitisation of customer journeys, which will get a boost post the LIC IPO,” said Surjendu Kuila, co-founder and CEO, Zopper.
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