On Wednesday, May 4, the initial public offering (IPO) of Life Insurance Corporation of India (LIC), the largest share sale in the history of Indian stock markets, opens for subscription. Should you invest?
Listing gains or wealth creation?
First and foremost, decide why you wish to invest in LIC’s IPO. Do you want listing gains or build wealth over time?
Put aside the urge to make listing gains for a moment. LIC is one of India’s most trusted brands. Trust is the most important factor in purchasing insurance, and it carries a lot more weight when it comes from a government company. So apply for the shares, use multiple accounts, and you’ll be fine. This is subject to your risk profile and assessment.
Be prepared to invest more after the listing. How much to invest in the shares after listing depends on a number of factors. LIC has its own set of strengths and weaknesses.
LICs will sell shares worth Rs 20,557 crore in a price range of Rs 902-949. Existing policyholders will receive a discount of Rs 60 per share; retail investors and employees will get a discount of Rs 45 per share. To secure an allotment of shares, investors should apply for the stock at the higher price band. The discount provides investors a safety net.
Understand what works and what may continue to work in LIC’s favour.
Attractive valuation in comparison to its peers
The revised LIC IPO looks appealing because it is available at an embedded value per share of 1.1 times, which is at a discount of nearly 65 percent compared to its peers in the private life insurance space such as HDFC Life Insurance, SBI Life Insurance or ICICI Prudential Life Insurance.
In fact, HDFC Life is trading at a price to embedded value of 4-times, SBI Life at 3-times, and ICICI Prudential Life at around 2-times. As a result, LIC offers investor an excellent opportunity at a reasonable price.
LIC, alone, is larger than the overall Indian mutual funds industry. As of September 30, 2021, LIC had total assets under management (AUM) of approximately Rs 39 lakh crore, which is greater than the AUM of the entire mutual fund industry. In fact, LIC invests the majority of its debt instruments in sovereign and AAA-rated securities, while more than 90 percent of its equity investments are in stocks that are part of the Nifty 200 and BSE 200 indices.
Largest market share, but is it losing ground?
Based on total premiums received in financial year 2021-2022, LIC has a market share of more than 60 percent. That makes LIC the market leader. But, it has consistently lost market share.
Yet, even though it is losing market share, it still has the largest share of the life insurance market, even when compared to international insurance market leaders. To reclaim its lost market share, it must mitigate risks by providing more robust product offerings and utilising channels such as Bancassurance (remember that a majority of life insurance business for SBI, HDFC and ICICI comes from their bancassurance channels), among other things.
Strong agent network has led to penetration
LIC also has the largest network of life insurance agents, accounting for more than half of all individual agents in India.
India is largely under-insured country, although after the COVID-19 pandemic, people have started taking insurance more seriously. This creates an opportunity for the sector to grow. India has the highest protection gap among Asia-Pacific (APAC) countries, at more than 80 percent. Given our size and under-penetration, it presents a good opportunity to continue generating a minimum of 15 percent new business profit (NBP) for a long time.
A large-cap stock waiting to enter indices
After its listing, LIC will be a part of the NIFTY and SENSEX indices and may continue to be one of India’s top companies, making it a stock to hold in your portfolio. The percentage of allocation is determined by your risk assessment.
There are a few concerns which you need to be careful about:
Lower profit margins than competitors
The majority of LIC’s revenue comes from savings plans, which have a higher operating cost than selling protection plans. LIC’s VNB margin, or Value of New Business margin, is around 10 percent, which is very low when compared to SBI Life’s 21 percent, HDFC Life’s 26 percent, and ICICI Prudential Life’s 27 percent.
LIC has a lot of ground to make up here.
Also, LIC must step up its game by utilising digital platforms and creating a robust digital experience similar to that offered by its competitors.
The bailout king
The government controls LIC, and in the past, LIC has bailed out many companies that were in trouble. Even the LIC’s share sale prospectus states that it may be required to take certain actions with no guarantee that such actions will be beneficial. We can only hope that this changes after its listing.
Stock price rise can be slow if supply is consistent
There is concern that LIC will continue to come out with offers for sale to raise more money, which may work against the stock price, as opposed to that of a company like Tata Consultancy Services Ltd (TCS), which, rather than issuing more stock, ends up buying back its own. But, as long as you’re invested in a solid company like LIC, you shouldn’t be too concerned about supply; if there’s a correction, you can always add more.
Should you invest?
Follow the 50-25-25 rule before you invest in LIC or any other stocks. You can follow my rule, which states that you should invest 50 percent of your equity allocation in top and emerging sectors such as banking and finance, auto, information technology, insurance, and so on, and invest in the top 2 or 3 companies from these sectors. The remaining 25 percent can be invested in any good mid-cap company, which means any company that is not in the top 100 by market capitalisation and is between the top 101 and 250 in India. The remaining 25 percent can be invested as you see fit, which means you can do whatever you want with it as long as you don’t break the rules.
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