The government-owned insurance behemoth LIC is getting ready for its first public offering (IPO). The numbers are stunning. Even by conservative estimates, the sale may be worth Rs 52,000-90,000 crore, dwarfing Paytm’s Rs 18,000 crore IPO last year, which was India’s most significant. Following Reliance Industries and TCS, the insurer might become the country’s third most valuable company following its IPO.
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While the market has already priced in this and the US Fed’s concerns, SATISH MENON, executive director at Geojit Financial Services, told Nikita Vashisht that if the actual outcome differs from the market’s projections, there might be more downside. Excerpts that have been edited: How much more fall can the needs take from here? After the correction, which sectors appear to be the most appealing?
According to those acquainted with the issue, the government may opt for a smaller initial public offering (IPO) for Life Insurance Corporation of India (LIC) than initially planned, fearful of investor reaction given market volatility and portfolio withdrawals.
However, there are no immediate plans to postpone the sale because there is strong local interest in the country’s largest life insurance company. They said it might ask the market regulator for a special exemption for a sale of less than the 5% interest proposed in the draft offer document and required by the rules.
Should you commit to a long-term subscription to the primary issue?
The upcoming mega LIC IPO has a subscribe’ rating from most Dalal Street analysts, as the asking valuation of 1.1 times EV, at a 65 per cent discount to private peers, appears undemanding and adequately accounts for concerns about the largest insurer’s recent market share loss and low value of new business (VNB) margin.
The Rs 20,557 crore LIC issue will go on sale on May 4 at Rs 902-949, with a discount of Rs 60 per share for policyholders and Rs 45 for retail investors and employees.
According to Sandip Sabharwal of asksandipsabharwal.com, the overall LIC IPO pricing appears to be better than expected.
“The scope of the problem has shrunk significantly. We were talking about a Rs 70,000 crore IPO at one point, but now we’re talking about a Rs 20,000 crore issue. On the retail side, there will be many people who haven’t invested in the market and who will subscribe to LIC and not sell.
“It should be a good issue. However, I’m not optimistic about LIC’s long-term prospects because they’re losing market share.” They aren’t growing much, but there is still a lot of value, and the prices are reasonable,” Sabharwal added.
Before investing in India’s largest IPO, think about the risks.
“I would rather wait for LIC to be listed, and then I would determine whether or not to buy LIC at that time,” says Rajat Sharma, Founder & CEO of Sana Securities.
Private players’ competition-
LIC is India’s only public sector life insurance. Hence it faces competition from commercial insurers. There are, however, 23 other private insurance businesses as of FY21. LIC’s main competitors are SBI Life Insurance Company Limited, HDFC Standard Life Insurance Company Limited, and ICICI Prudential Life Insurance Company Limited. Because of its size, there is no other life insurer in India that is directly comparable to LIC.
Interest rate fluctuations-
Interest rate swings could significantly and negatively impact LIC’s profitability. Furthermore, the ability of LIC to closely match the duration of assets and liabilities may be limited by the limited amounts and types of long-term fixed income products available in Indian capital markets, as well as legal and regulatory requirements on the types of investments and parts of investment assets that insurance entities are permitted to make.
Despite the IPO, the government will continue to be a significant shareholder: The government will remain the significant stakeholder and manager even after the initial public offering.
Despite the IPO, the government will remain a substantial shareholder.
“Any future government intervention might be harmful to investors.” Insurance is tricky for new investors to grasp because many words are based on several estimations and assumptions. According to Nyati, new investors will need time to become familiar with embedded value, the value of new business margins, APE, GWP, and others.
“LIC’s new policy growth rate has slowed as the company loses market share to private insurers, particularly in metropolitan areas. Furthermore, most of LIC’s new business premiums are procured through independent agents (-97 per cent). “There could be a material detrimental effect on LIC’s results of operations if they are unable to retain and recruit individual agents on a timely and fair basis,” Asit C Mehta Investments Intermediates stated.
“On a consolidated basis, LIC’s first-year premiums decreased by 41.24 percent in Fiscal 2021. While the primary reason for the decrease was a higher base in Fiscal 2020 as a result of a first-year premium of 223,160 crore from a superannuation scheme with one of the state governments completed in May 2019, COVID-19 also harmed LIC’s distribution partners’ ability to distribute their products due to lockdowns and social distancing measures that limited in-person interactions “In a note, Axis Bank stated.
The LIC IPO valuation may be affected by market volatility.
The LIC board approved a 3.5 per cent stock dilution in the offer over the weekend, down from the intended 5 per cent. The company is anticipated to be worth more than Rs. 6 lakh crore.
According to ET, a 3.5 per cent dilution will result in an offer size of 21,000 crores, down from earlier projections of 60,000-63,000 crore in an IPO valuing the business at 13 lakh crore.
Any reduction in the dilution of ownership will require clearance from the Securities and Exchange Board of India (Sebi). The corporation will be able to move forward without updating the financial numbers again because the issue will be released in early May.
“We inserted the December 2021 numbers in the draft prospectus, which are valid until May 12,” one of the reported individuals claimed. “If everything goes according to plan, we won’t need to update because it will take at least another couple of months, which may not be ideal given market volatility, geopolitical concerns, rising inflation, and generally gloomy investor sentiment. So, rather than waiting for a better opportunity, we opted to go immediately with a lower dilution.”
According to analysts, the market scenario has changed in recent months, affecting the valuations of life insurance firms, which will be factored in by investors wishing to invest in LIC.
“The market has lowered valuations for discretionary spending in general, and insurance businesses have been hurt as well,” said Manish Ostwal, an analyst at Nirmal Bang Securities. “LIC will also have to deal with the discount that investors place on public enterprises as a result of government intervention.” All of these things will have an impact on the LIC’s value.
The two most prominent publicly-traded life insurance businesses have been impacted by market volatility. Both ICICI Prudential Life and HDFC Life are trading near their recent highs.
ICICI Pru is down 25% to 533, down from 664 in November, and HDFC Life is down 23% to 554, down from 720 in November.
Global and local pension funds, sovereign wealth funds, and international institutional investors have been lined up as anchor investors for the offer.
“We have a diversified group of investors,” one of the individuals mentioned above noted. “More crucially, a smaller issue allows investors to make post-listing gains, which should enhance the issue’s demand.”
Since February, LIC has changed its draught red herring prospectus three times.
SBI Capital Markets, ICICI Securities, Kotak Mahindra Capital, Axis Capital, JM Financial, Nomura Securities, Bank of America, JP Morgan, Goldman Sachs, and Citibank are ten investment banks involved in the transaction.
According to those familiar with the matter, the government may have to lower its valuation forecasts for the Life Insurance Corporation of India (LIC) IPO, which is set to start two weeks after the overall size of the offer was decreased. They projected that the recent decline in the stock price of private sector life insurers would have an impact on India’s largest insurance company.
Investment Blunder: LIC Sixth Largest Govt. Asset to lose Rs 30,000 Crore with its IPO
When the domestic and international financial markets are in turmoil, why is the government attempting to sell LIC?
Congress questioned the pricing of shares ahead of the big LIC IPO on Tuesday, stating that they are undervalued and given at throwaway prices at the expense of the faith of 30 crore policyholders.
According to Congress national secretary and senior spokesperson Randeep Surjewala, the government reduced the LIC valuation from Rs 12-14 lakh crore in February to Rs 6 lakh crore in just two months.
He said the government had hoped to raise Rs 70,000 crore by selling a 5% interest in the public sector venture in February, but that objective has now been lowered to Rs 21,000 crore and a 3.5 per cent stake.
“Why is the government attempting to sell LIC when domestic and global financial markets are in upheaval due to the Russia-Ukraine conflict and a slew of other issues contributing to the economic crisis,” he wondered.
“The Secretary in charge of public sector divestment has stated that if market conditions are not favourable, the government will not sell its holding in PSUs.” Why is LIC’s initial public offering an exemption to this rule? India is looking for answers,” he stated.
According to Surjewala, the LIC disinvestment was intended at 2.5 times the embedded value (EV) when the prospectus for this massive IPO was filed in February 2022. Still, the IPO’s valuation is presently around 1.1 times the underlying value.
According to him, HDFC Life Insurance trades at 3.9 times EV, while SBI Life and ICICI Prudential Life change at 3.2 times and 2.5 times, respectively, their inherent value.
He also claimed that the Modi government paired down the LIC share price band from Rs 1,100 per share to the current price band of Rs 902 – 949 per share from January to February 2022 and that some experts believe the state exchequer will lose Rs 30,000 crore as a result of the reduction in embedded value and the pairing down of the price band.
“Why did the Modi Government suddenly reduce the valuation of LIC and the issue size after roadshows in India and abroad,” he claimed, claiming that in February 2022, the government held formal roadshows for big-ticket investors, Pension Funds, Mutual Funds, and Investment Corporations to raise Rs 70,000 crore by selling off 5% of the company.
He demanded answers from the government as to why there was a “change of heart” after roadshows in other countries to modify the value and cut the stake sale from 5% to 3.5%, “which remains unexplained.”
He claims that every market observer or financial expert is baffled as to why the government is undermining these crucial variables. According to the Congressman, the LIC has 30 crore policyholders, total assets of Rs 39,60,000 crores ($526 billion), and a stock portfolio of Rs 52,000 crore as of September 2021.
From April-September 2021, the company earned Rs 3.35 lakh crore from its investments and directly employed 13.94 lakh households (12.80 lakh agents plus 1.14 lakh workers) through its 3,542 offices across the country.
He claims that the company issues three crore policies per year, or around one lakh per day, and has been named the tenth-largest insurance brand.
With the growing criticism over the rising Inflation and Political revolt from opposition groups, This LIC IPO raises the brows of the Investors.
Congress Leader Randeep Surjewala held a press conference today addressing the wrongdoing of the GOI in LIC.
He asserted, “Is the Modi govt ignoring LIC’s key indices? High ROE. the compound annual growth rate of the company, net premium earned by the company, and its market share in India – these are the four denominators when you start to value a company. LIC is the 6th largest in the world when it comes to assets under management. The total value of these assets is USD 56 billion. The reason for the govt undermining these key indices in arriving at the valuation is unknown. Why was the LIC valuation of Rs 12-14 lakh crore in Feb 2022 reduced to Rs 6 lakh crore in just two months?”
“Most experts have said that LIC shares are highly undervalued. While filing the prospectus in Feb 2022 for this mega IPO, LIC disinvestment was aimed at 2.5 times the embedded value. Now the EIC valuation has been reduced to 1.1 times the embedded value”, indicating the reactions expressed by the Economists; Randeep Surjewal attacked the government and questioned the integrity of GOI, which is allegedly in a hurry to sell out government institutions.