NEW DELHI: After much deliberations about Life Insurance Corporation’s (LIC) market debut since the past 2 years, the stock finally listed on the BSE and NSE on Tuesday.
However, the share fell prey to stock market volatility in wake of the geopolitical tensions, soring inflation, concerns over rapid rate hikes, a falling rupee and diminishing forex reserves.
In other words, the share was dogged for weeks by worries about an ailing global economy.
LIC listed at Rs 872 apiece, compared to the issue price of Rs 949. During the day, the stock touched a session high of Rs 918.95 before closing at Rs 875.45.
For all categories of investors, the listing price proved to be non-profitable.
LIC had offered the shares at a discount of Rs 60 to its eligible policyholders, while a discount of Rs 45 was offered to employees and retail investors. This meant the issue price for the former was set at Rs 889 per share, while for the later it was Rs 904.
However, even at discounted issue price both categories of investors suffered a loss on listing.
Even so, market experts and analysts sound optimistic about the stock, given its strong fundamentals. After all, a listing day loss does not necessarily mean its a bad investment. Most believe it would be a good bet to hold on to the shares.
The government raised roughly Rs 20,500 crore ($2.7 billion) from selling a 3.5% stake in the IPO, a far cry from its initial target to bring in up to $12 billion.
After a successful initial public offering (IPO), which happened at a price band of Rs 902-949, LIC had fixed the issue price of its shares at Rs 949 apiece.
The government sold over 22.13 crore shares or a 3.5 per cent stake in LIC through the IPO.
The IPO had received 73 lakh investor applications from all categories other than anchor investors. It received 10.85 lakh applications from first-time investors, of which, more than 7 lakh got allotment.
Close to 46% of the investors were from the western part of the country, 44% from north and south, 9% from east and north-east saw 1% participation, department of investment and public asset management (Dipam) secretary Tuhin Kanta Pandey.
Foreign institutional investors (FII) bids were to the tune of Rs 2,291 crore in the main book and they also invested Rs 555 crore in the anchor book, Pandey said.
“It was an atmanirbhar issue which got subscribed mainly domestically. This gives us a very-very optimistic view of the capital markets going forward,” Pandey noted.
What does it mean for the stock
Even after a lackluster listing, LIC is the fifth most valuable company in the country with a market capitalisation of about Rs 5.54 lakh crore.
In a way the share price decline reflects weak overall market sentiment and a slump in the broader market since LIC’s IPO opened for subscription on May 4.
Given the extreme volatility that stock markets globally have been subjected to in the past few months, LIC chairman M R Kumar also said that they did not expect a big listing.
“We were not expecting a big listing as markets were jittery, expect it to pick up,” Kumar said.
Analysts are also of the view that LIC’s valuations were attractive as compared to its peers, so it might be profitable in mid to long-term.
The timing of the IPO has also been questioned by experts. Not only in India, but stock markets globally have been under pressure. With inflation numbers through the roof and the Reserve Bank of India (RBI) looking hike interest rates, markets are experiencing extraordinary volatility.
“Nobody can predict the market. We have been saying that it should not be held for a particular day but for more than a day,” Pandey said after the listing of shares.
How investors reacted in past
LIC is the latest in a string of companies that has fallen sharply after listing as investors looked closely at potential profitability and question valuations.
Many investors enter the market through IPOs with the objective of making quick gains on listing. Specifically, for small investors, IPOs are a good medium to invest.
However, entering the market has its own risks too. An investor needs to be prepared for both gains as well as losses.
Another significant point to be noted here is that, a gain on listing day does not guarantee that the stock will give stellar returns in long-term as well. It all depends upon strong a company’s fundamentals are and that eventually holds the price.
There have been many stocks over the years which gave significantly higher returns to its investors by listing at a price higher than the issue price, only to fall below the threshold after realisation draws.
A report by Economic Times cited the example of Everonn Systems which got listed in August 2007 at a price of Rs 478, a premium of 241% to the issue price of Rs 140. The stock is now delisted.
Similarly, Policybazar was listed a price of Rs 1,203 per share in November last year as against its issue price of Rs 980. The stock now trades at a price of Rs 717.
Fintech firm Paytm — which was India’s largest IPO until LIC — plunged in its debut last November following a $2 billion IPO, and its shares now are worth not much more than a quarter of its IPO price.
However, these examples in no way suggest a tepid market for all companies that are launching or are about to launch their IPOs soon.
There are also stocks which opened below the issue price but rose because of the inherent value in the company and a clear path to profitability. A good example of this is L&T Infotech which was listed in July 2016 at a price of Rs 698, 2% below the issue price of Rs 710. The stock is now up almost 800% from this level.
In the same way, ICICI Pru Life, SBI Card, UTI AMC all were listed at a discount but are now trading at a much higher price.
What should investors do now
Dipam secy Tuhin Kanta Pandey said the weak debut on the bourses was due to unpredictable market conditions and suggested investors to hold on to the stock for long-term value.
LIC chairman M R Kumar also sounded optimistic on the long-term prospect of the stock and said that the price will pick up with time.
LIC Chairman M R Kumar said: “It (stock price) will pick up as we go along. I am sure a lot of people, especially the policyholders who have missed out on the allotment will pick up the shares (in the secondary market). I don’t see any reason why it should be tepid for too long”.
Market experts too suggested that investors should hold on to the shares and the scrip will see an uptick in the long term.
“We are recommending buying with a medium- to long-term perspective on an at-par listing, as valuation multiple of price-to-embedded value of 1.1 times on historic basis is attractive,” said Geetanjali Kedia, senior research analyst at SPTulsian.com.
Brokerage Macquarie has initiated coverage on the stock with a ‘neutral’ rating. The foreign brokerage has suggested a target for LIC at Rs 1,000, which hints at a modest 5.37% upside over the issue price of Rs 949.
The brokerage firm said any investor, who is taking exposure to LIC, is indirectly taking exposure to equity markets and the inherent volatility that comes with it.
It added that a 10% correction in the domestic equity market could lead to 7% fall in the embedded value of the state-run life insurer as against a 1-2% impact for private sector life insurers.
Axis Securities MD & CEO B Gopkumar told news agency PTI that investors should not look to exit at current levels and hold the stock from a medium to long-term perspective.
“We believe LIC continues to be a solid bet in the long run as it is a play on the growth story of the under-penetrated life insurance industry. Its sustained market leadership position, robust pan-India distribution network, and shifting focus towards profitable products, thus supporting margins and improving persistency ratios, will collectively make LIC an attractive pick from a long-term perspective,” Gopkumar said.
Geojit Financial Services head of research, Vinod Nair also noted that LIC is a decent investment opportunity in the short to medium-term considering its strong market presence, improvement in future profitability due to the changes in surplus distribution norms and strong sector growth outlook.
Meanwhile, Funds India CEO Girirajan Murugan said once the dust settles on the market due to the ongoing issues related to Ukraine- Russia war and the worries on the Inflation front, stocks in the insurance sector along with other beaten down stocks in the banking/ NBFC space should see good momentum.
“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,” Murugan said.
(With inputs from agencies)