Life Insurance Corporation of India (LIC) will launch the biggest initial public offer (IPO) in the history of Indian stock markets on Wednesday, May 4, 2022. Through this IPO, the government of India will be liquidating its 3.5 percent stake in the corporation, and aims to mop up about Rs 21,000 crore at the upper end of the price band of Rs 902 – 949 per share. This will result in an implied market capitalisation of Rs 6 lakh crore for the company.
LIC is the largest life insurer in India across the parameters of GWP (gross written premium), NBP (new business premium), number of individual policies issued, and the number of group policies issued. It has a market share of 61.4 percent in NBP (individual and group), compared to the nearest competitor, which has a market share of 9.16 percent on an NBP basis (individual and group).
It is ranked fifth globally by life insurance GWP and 10th globally in terms of total assets. As at December 31, 2021, LIC had 2,048 branch offices and 1,559 satellite offices in India, covering 91 percent of all districts in the country.
Features of the IPO
The government will be selling the stake entirely through an offer for sale (OFS), under which 10 percent of the shares are reserved for LIC policyholders and 0.7 percent for LIC employees. Also, 31.25 percent is reserved for household (retail) investors.
Applicants from these categories will get a discount of Rs 45 (Rs 60 for policyholders) on the actual offer price. For these categories, the maximum application is restricted to Rs 2 lakh, implying 230-odd shares at the lower price band after discount.
The offer will close for subscription on May 9 and the allotment of shares will be finalised on May 12. The refunds will be credited back to the accounts of unsuccessful bidders on May 13, and shares will be credited to the demat accounts of successful bidders on May 16. LIC shares will make their debut on the stock exchanges on May 17.
Ahead of LIC IPO a look at some worrying spots
Brokerage recommendations
Brokerages and market experts unanimously recommend investors to subscribe to the issue as the current valuations are attractive, considering its strong market presence, improvement in profitability due to changes in surplus distribution norms and strong sector growth outlook. They justify the discount to private players because of the headwinds like declining market share, lower short-term persistency ratios and sub-par margins.
According to a report from Nirmal Bang Institutional Equities, the company’s latest reported embedded value (EV at Sep ’21) stands at Rs 5.4 lakh crore, increasing by 4.6x since March ‘21, driven by the change in the company’s surplus distribution policy, which entails paying 10 percent of par surplus and 100 percent of non-par surplus to shareholders.
The protection gap in India is 83 percent (as of 2019). This is the highest amongst APAC countries. Given the opportunity, experts feel that India’s life insurance NBP is expected to grow at a 14-16 percent CAGR over the next decade.
“In the light of LIC’s market positioning and expected product launches, the company is poised to benefit to a great extent, and, at the upper price band of Rs 949, the issue is valued at 1.1x EV (Sep ‘21), which is at a significant discount to private sector valuations,” a report from Nirmal Bang Institutional Equities said, while recommending investors to subscribe to the issue.
(The insurance protection gap is the difference between the resources you’ll need and the resources you have available in the event of an unfortunate event occurring. In other words, if you pass away, it’s the gap between the resources needed for your family to carry on without you, and the resources they’ll have available to do so).
Experts opine that the insurance industry is growing due to considerable government initiatives, democratic factors, a favourable regulatory system, expanded partnerships, product innovations, and a robust distribution mix. In addition, COVID-19 has increased healthcare awareness, and thus health insurance will significantly contribute to the efforts to rebuild the health sector.
Three points on which LIC IPO needs to be evaluated
Brokerage firm KR Choksey believes that, overall, LIC has been a consistent player with stable margins and with the shift in the product portfolio strategy and diversification of distribution mix, the company will have a huge opportunity to grow on all fronts.
“The protection segment is the next key trigger for growth for life insurers, where LIC’s contribution is lower as compared to its peers. We believe, with increased focus on this segment, LIC is well poised to capture the industry opportunity,” a report from KR Choksey said.
“We believe valuation for LIC is reasonable, keeping in mind the valuations at which the peers are trading and the industry average,” the report from KR Choksey added. The discount in the multiple for LIC could be because of current dependence on traditional product segments, lower VNB margins, higher employee expenses, and agency distribution mix, compared to its private peers.
KR Choksey expects the company to focus on its strong growth momentum by gaining its market share and focusing more on underwriting quality and high margin product mix. “Given the growth prospects for the pension/ annuity segment and the company’s position as the market leader in the insurance sector, the company’s valuation will be at par with private peers,” the brokerage said in its report, as it recommends investors to subscribe to the IPO for listing as well as long-term gains.
Parth Nyati, Founder, Tradingo, has a word of caution for the investors as he feels that, “even post listing, the government will still be the major shareholder and the key manager. Thus any future government intervention might be detrimental to shareholders”.
He further added that the company has made plans to address the issues pertaining to the company like losing market share to private players, lower profitability and revenue growth, compared to private players, lower VNB margins, and short-term persistency ratios.
LIC is planning to take steps like increasing up-selling and cross-selling, increasing direct sales of their individual products on their website, designing products for the millennials, focusing more on non-par products, and protection-based products, and linked products.
“Investors must be aware that the business of insurance is long-term in nature; therefore, we recommend this issue for the long-term only,” said Nyati.
Reliance Securities also recommends investors to ‘subscribe’ to the issue while highlighting that LIC faces key risks from any inability to retain and recruit individual agents on a timely basis and at reasonable cost. It is exposed to misconduct and fraud by employees and intermediaries and interest rate fluctuations, it said.
Disclaimer: The views and investment tips of investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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