The Ukraine conflict is more than probable to push the LIC IPO into the next fiscal year, with a re-evaluation of the March listing expected this week; Should you put money in LIC IPO? 14 factors to review

The Ukraine conflict is more than probable to push the LIC IPO into the next fiscal year, with a re-evaluation of the March listing expected this week; Should you put money in LIC IPO? 14 factors to review

The Ukraine conflict is more than probable to push the LIC IPO into the next fiscal year, with a re-evaluation of the March listing expected this week; Should you put money in LIC IPO? 14 factors to review

According to government sources, the crisis between Russia and Ukraine will push the Life Insurance Corporation of India’s (LIC) Initial Public Offering (IPO) into the following fiscal year.

Following Russia’s invasion of Ukraine, India may reconsider the timing of Life Insurance Corporation of India’s inaugural share sale, the state-owned insurer, Finance Minister Nirmala Sitharaman, said in an interview.

An official told CNBC TV18 that FM Sitharaman had stated the government’s position on the topic, pointing to her words in a recent interview in which she hinted that the growing global scenario requires a rethinking of the IPO timeline.

The government has held a meeting to reassess the IPO timing in the current scenario of the escalating Russia-Ukraine war; sources told CNBC TV18 on March 

1. The much-anticipated Initial Public Offering of state-run insurance giant Life Insurance Corporation of India (LIC) could be pushed to the next financial year. The finance minister told Business Line that the LIC IPO time bracket was established with local variables in mind and would prefer to go further. Sitharaman, on the other hand, stated that she is willing to revisit the ideas.

A government person familiar with the position stated to a television station that a meeting for a possible LIC evaluation will be conducted “this week.”

According to the official, Finance Minister Nirmala Sitharaman has “stated the government position on the topic, her comments in a recent interview with Hindu Business Line. 

She noted that the evolving global environment would rethink the IPO timeline.

“I’ve been planning for a long time critical on Indian factors, and I’d like to do this,” said Sitaraman. “If global circumstances allow, it’s okay to look again.” Added. 

“If a global cause needs it, I want to see it again,” she continued.

The assessment will affect the timing of India’s largest Public Offering, which clarify most of the country’s $10.4 billion asset-sale programs targeted at reducing the budget deficit for the fiscal year ending March 31, 2022.

The government had set a March deadline for the IPO, and the insurance giant’s embedded value was estimated to be 5.4 trillion rupees ($71.7 billion) in its IPO paperwork submitted on February 13.

Indian markets have been volatile since Russia’s invasion of Ukraine last week, and government officials are concerned that international and domestic investors would shy away from buying shares in the insurance firm.

Nonetheless, “There is now a full-fledged war. As a result, I’ll need to revisit the matter, According to Sitharaman.

When questioned if the government’s yearly disinvestment goals will restrict a decision to delay the IPO, she stated, “When a private sector promoter takes this judgement, he merely needs to explain this to the entity’s board.” “However, I’d have to explain it to the rest of the world.”

Until today, all signs were that the insurance behemoth’s first Public Offering (IPO) would go down without a hitch. Even after the Russian invasion last week, LIC and the Department of Investment and Public Asset Management (DIPAM) continued roadshows.

On February 13, the LIC IPO’s draft red-herring prospectus was made public.

 The Offer includes the sale of up to 316.25 million shares or about 5% of the shares of the insurance giant Center.

On February 22, Sitharaman told reporters in Mumbai that the government was moving forward with the IPO, which has created a commending buzz in the market.

The government and LIC’s management had initiated virtual roadshows for India’s largest-ever Public Offering, hoping to sell a 5% share in the company in march in order to generate almost USD 8 billion.

Last Saturday, the federal government passed the guidelines adjustment to allow up to 20% foreign direct investment in LIC. This is a move aimed at speeding up the listing of public insurance companies.

“There is a lot of noise in the market about the LIC IPO, and there is a lot of interest. “We are moving through with it,” Sitharaman said, adding, “but we are equally concerned if the market environment is commendable.

The potential war in eastern Europe, in particular, has caused market anxieties all across the world. The sanctions placed on Russia are expected to aggravate the situation, with the commodities market taking the brunt of the blow. 

Crude oil prices have surpassed $100, and Goldman Sachs’ one-month Brent projection has been increased to $115.

Because the draft red herring prospectus (DRHP) was submitted with the markets regulator on February 13, it was mass predicted that the IPO would launch between March 7 and 10. The RBI said on March 8 that it would perform a Currency Exchange, adding to the suspicion.

 The currency swap was set up to take in cash surplus in the banking system, which was probably due to the IPO. The IPO size was projected to be Rs 65,000-75,000 crore, more than 3.5 times Paytm’s Rs 18,300-crore IPO, which was the highest before. Although the government had not stated the targeted mop-up, given the valuation, the IPO size was believed to be Rs 65,000-75,000 crore.

Sanctions have wreaked havoc on the Russian economy. The geopolitical concerns impacted European courses in addition, with the key German and French indexes dropping nearly 3% in early trading hours this week.

The pressure to fulfil Income Objectives from the sale of government holdings in enterprises in the current fiscal year, which ends March 31, she stressed, would not be taken into view of selecting when the LIC will be listed.

An IPO is often launched during a market upswing, according to investment bankers. While the Indian equities markets were not in a bear market, overseas investors were wary of taking risks, resulting in a net outflow of foreign portfolio investors.

 While the government was aiming for long-term investors, like sovereign funds, to anchor the issuance, a market downturn would undermine ordinary investors’ confidence. According to the DRHP, 31.6 crore shares, representing 5% of the Equity shares, would be auctioned. 

The inherent value of LIC was appreciated in the Offer document to be Rs 5.4 lakh crore. Even using a standard 2.5x multiple for the EV, the company would be valued at roughly Rs 13.5 lakh crore, which would be a substantial increase.

IMPACT OF THE RUSSIA-UKRAINE CONFLICT

Eastern Europe’s turmoil has had an influence on global stock markets, including the BSE, Sensex and NSE Nifty, in addition to international oil prices. Various analysts have warned that owing to Russia’s invasion of Ukraine; worldwide inflation may rise.

THE STAGE HAS BEEN SET FOR THE MARKET LAUNCH

Last week, the Union Cabinet, led by Prime Minister Narendra Modi, approved up to 20% FDI in LIC’s IPO-bound IPO through the automatic route, with the goal of expediting the country’s largest insurer’s disinvestment.

On February 13, Life Insurance Corporation submitted draft documents with capital market regulator SEBI for the sale of a 5% share by the government for an estimated Rs 63,000 crore, paving the way for the country’s largest-ever Public Offering.

DETAILS OF THE LIC INITIAL PUBLIC OFFERING

The government’s Initial Public Offering (IPO) of around 31.6 crore shares, or a 5% stake, is expected to reach D-street in March. Employees and policyholders of the insurance behemoth would be eligible for a reduction off the average rate.

International actuarial firm Milliman Advisors has estimated LIC’s embedded value, which is a measure of the consolidated share-holders value in an insurance business, to be over Rs 5.4 lakh crore on September 30, 2021 according to the Draft Red Herring Prospectus (DRHP).

The size of LIC is unrivalled. LIC, despite the entry of private insurance companies into the market 20 years ago, despite that sells over 70% of all life insurance policies in the country and collects 65% of all new premiums. The assets under the control of the next largest insurance company are about 16 times higher than the investment mutual funds sector as a whole.

INDIA’S MAJOR INITIAL PUBLIC OFFERING

There is not much that can match it. State insurance giant LIC is preparing for an Initial Public Offering (IPO) next month. 

The numbers are great. Even with a conservative estimate, this issue could be worth Rs.52,000-90,000 crores, and Paytm’s last year’s Rs.18,000 crores IPO was the largest India ever. Following Reliance Industries and TCS, insurers could become the third most valuable company in the country when released.

The LIC Public Offering will be the largest in Indian stock market history. When LIC gets listed, its market value will match that of leading firms, including RIL and TCS.

The sum raised by Paytm’s IPO in 2021 was the greatest ever, at Rs 18,300 crore, followed by Coal India (2010), which raised roughly Rs 15,500 crore, and Reliance Power (2008), which raised Rs 11,700 crore.

Can LIC catch up with more agile private insurance companies?

It’s a worrying fact that it lurks beneath stunning numbers and images. After 60 years of government control, the company was under severe pressure, suffered losses, and became inefficient.

It took some work to turn an IPO into a reliable product that could withstand the scrutiny of key domestic and international investors. ET Wealth scrutinized the Draft Red Herring Prospectus (DRHP) numbers and ranked good, bad, and ugly numbers to get the big picture. As a result of government directives.

LIC was obliged to place government bids whenever requested. Its huge cash reserves are routinely used to recapitalize public sector banks, complete PSU public offerings to reach divestment goals, and for other purposes. If IDBI Bank’s capital status has been below the minimum capital requirement for at least five years, LIC is ready to inject funds into the bank. Such orders can adversely affect LIC’s financial position. 

Our company may be forced to engage in certain activities to promote GoI’s economic or political goals, stated by DRHP. He does not know if such a move would be beneficial to them. As a result, any action by the government can harm stakeholders holders.

This is reflected in LIC’s high total NPA ratio, the highest of all insurers listed in 2020-21 at 7.78 per cent.

 “LIC needs to get rid of the appearance of being the saviour of the government’s financial difficulties,” said Deepak Jasani, head of retail research at HDFC Securities. This may not be acceptable to minority shareholders. We will consider such behaviour in more detail in the future.

The policyholder’s profits are reduced. To make the IPO more attractive to shareholders, LIC needed to change its surplus distribution strategy. She shared the Joint Life Fund last September. Profit or profit from LIC’s investment is retained in this pot. 

The fund is divided into two parts. One is for participating policyholders, and the other is for non-participating policyholders. Participating policyholders receive a portion of the company’s profits, but non-participating policyholders do not.

Previously, policyholders received 95% of life fund assets, and shareholders received the rest. Money that does not participate will be distributed to all shareholders.

 Equity funds are first split between policyholders and shareholders at a ratio of 95: 5 and then between them at a ratio of 90:10. As a result of this restructuring, the surplus available to LIC’s participating policyholders (which make up the majority of the company’s product mix) will be reduced. 

It will weaken the appeal of LIC for some clients, possibly leading to surrenders. “It would be interesting to observe how policyholders react to this new arrangement,” says Vaibhav Agrawal, Teji Mandi’s Founder and CIO.

Increased embedded value

The separation of life funds represents another important purpose of LIC. It is to maintain the underlying asset value (EV) of the fund. 

This statistic is used to determine the value of an insurance policy. This is the sum of all future returns and net worth from the current business. The embedded value is usually given as a multiple of the company’s valuation.

 After the Life Fund split, LIC’s embedded value has increased five-fold, allowing for more distribution to shareholders. Keep in mind that EVs are calculated using various assumptions such as interest rates, sustainability, mortality, prices, and corporate performance.

This is not a reliable indicator of value, especially if the company is losing market share or is subject to strict government regulations.

Investors need to be aware of these weaknesses before comparing LIC’s EVs to their peers. Vikas Gupta, Chief Investment Strategist at OmniScience Capital, said: 

This makes an evaluation based on EV very difficult. Nevertheless, experts expect LIC to receive a lower EV multiplier than its private counterpart due to its public sector status and low profitability.

Market share is shrinking.

With a 60% market share, LIC is an industry leader, but over time it has lost to its private-sector competitors. In the first half of 2021-22, LIC’s market share in individual new business premiums fell from 56% in 2015-to 2016 to 44%. 

The once strong group insurance market is losing momentum. Private insurers not only improve their Internet presence and customer service but offer a wide range of products for younger customers.

As a result of the blockade by Covid, LIC’s market share has decreased. Analysts predict that the loss of market share for insurers will be mitigated by fixing their shortcomings. Paragujariwala, Investment Director of White Oak Capital Management, said.

Higher Return on Equity (RoE) is a mirage.

LIC’s profitability, as measured by return on equity (RoE), is unmatched by any other company in the industry. According to the company’s DRHP, the average RoE for three years is a whopping 289%. 

However, this number is not always comparable to peers. LIC is fully controlled by the government and has never required traditional funding. Until this year, it did not regain profits as a reserve. 

All proceeds were sent to the policyholder or government as dividends. This allowed us to keep equity low (only 100 rupees!) Until recently, resulting in a very high RoE. The company’s RoE fell from 405% in 2018-19 to 82% in 2020-21 after strengthening equity.

As the corporation seeks greater stock dilution over time, this figure will become more modest. High RoE should be overlooked, “said Jyothy Roy, DVPEquity strategist at Angel One. “Transferring the excess to reserves will increase LIC’s net worth and bring RoE to a more realistic level that reflects profitability.”

High agent dependency

An army of 13.5 lacs of independent agents makes up the distribution power of LIC. In 2021, this network accounted for almost 94% of new business premiums. Private insurers, on the other hand, rely heavily on the Internet and financial methods. “LIC’s agency team is a very ambitious and oily machine, trained to sell different schemes and is deeply involved in the LIC ecosystem,” said Jariwala.

However, there is the opposite view. The ability of agents to provide services is severely limited by the blockade. Individual brokers who have sold at least one insurance policy in the last 12 months have decreased by 17.48%, from 10.86 lacs on March 31, 2021, to 8.96 lacs on September 30, 2021. 

Because it depends on the broker, LIC tends to be easy to cancel. In 2021, almost two lacs of agents (or 16.6% of the total network) were discontinued. As of September 30, 2021, the LIC commission fee rate (total fee paid for total premiums) was 5.2%, while HDFC Life was 4.2% and SBI Life was 3.6%.

“You may need to increase commissions and other benefits to hire and maintain the right agents. The commissions paid to agents are capped,” says DRHP. To increase its online presence, LIC recently partnered with the insurance market Policybazaar.

 We are also trying to increase sales on our website. LIC also suffers from poor policy continuity. The 13-month persistence rate is 78.8%, indicating that one-fifth of the policies offered was cancelled after the first year. 

In the 13th month, the sustainability rate of private sector stakeholders was as high as 84-85%. On the other hand, LIC showed the most increased sustainability at 60.6% in the 61st month, compared to 45-52% for private players.

The product composition is distorted.

LIC continues to focus on traditional unbound savings products where demand does not depend on the market cycle. In 2021, irrelevant items accounted for 99.7% of the company’s portfolio. HDFC Life is the closest to the peer group, with un-linked products accounting for 71% of the premium. This enhances the security of returns and the security of policyholders. 

Because LIC is not at risk of death, premiums paid to re-insurers with a limited protection-oriented portfolio are low. At the same time, this combination of products keeps the rate of return on investment lower than non-participatory products such as ULIPs and deferred annuities that generate higher rates of return.

 Also, savings plans aren’t as profitable as other plans, so you can keep your LIC revenue low. “The value of LIC’s New Business Margin (VNB),” says Agrawal.

“LIC’s new business value (VNB) margins are very low compared to private providers because of product bias towards low revenue plans,” says Agrawal.

 

In comparison to peers, the product mix also results in smaller ticket size.

LIC’s average New Business Premium (NBP) per person insurance was Rs 26,892, much less than its competitors. “LIC’s product mix is aimed at savings and products with long-term participation,” says Jasani. 

This may limit our ability to make higher-risk investments. However, the company’s decision to share 10% of the bonus with shareholders (rather than the previous 5%) could encourage taking more risk in the future, so those policyholder payments are not compromised with a revamped excess distribution policy.

LIC now has a stronger motivation to focus on non-participating items with better margins.

The cash position is weak.

Although LIC has exceptional financial reserves, its cash situation has worsened in recent years. After reporting positive cash flows in the previous three fiscal years, other substantial operating costs reported positive cash flows from operational operations of Rs 11,114 crores in the first half of 2021-22.

 The company’s cash balance has decreased drastically from Rs.67,899.5 crores in 2018-19 to Rs.26,050 crores in the first half of 2021-22.

 This is mostly owing to pandemic-related disruptions in regular economic activities, in addition to increased damage-related payments. Private insurance businesses’ balance profiles were equally strained at the time.

Superiority in price

Despite the fee-based cost structure, LIC’s spending ratio is significantly lower than that of private providers. The ratio of operating expenses to total premiums in 2020-21 (8.7%) and 6 months 2021-22 (10.1%) is lower than the median operating expense ratio of the five major private providers over the same period. 

Also, the total expense ratio (including fees and operating expenses) is lower than that of private companies. According to analysts, LIC’s cost advantage over more efficiently operating private providers is due to the fact that it is a mature company.

 “Insurance is a business with operating leverage that grows with size,” says Agrawal. LIC is enjoying the benefits of 65 years of business. “

The investment is skewed.

LIC made the most money from the sale of shares in its 65-year history in 2020-21. In a great year, a large amount of return on investment is reflected in the company’s finances. However, Gupta points out; investors need to learn to distinguish between market-linked and corporate profits. 

“It is unlikely that the market will see such a huge cash increase on a regular basis.” According to Agrawal, sensitivity analysis suggests that LIC’s share books are more vulnerable to revisions than their peers.

It is worth noting that LIC’s investment portfolio tends to be prominent. With 80% for bonds and 20% for stocks, it has the highest debt-capital ratio in comparison to other companies in the same industry.

This resulted in decreased investment yields in 2020-21.

Should you put money into LIC?

The size and scope of LIC make it a unique product. Given the millions of people that believe in the LIC brand, it’s a big moat. At the same time, it faces many operational challenges, including excessive government intervention, distorted product and distribution combinations, and a fiercely competitive environment.

 Despite its strong position, LIC lags behind its private competitors by many standards. 

The company is actively conducting various steps to increase profitability and stop the decline in market share, but things are most likely to get even worse. “There are several leverages available to increase margins, but that will have long-term implications,” Roy believes.

Meanwhile, private insurance companies continue to step on the accelerator. According to Avinash Singh, Senior Research Analyst at Emkay Global Financial Services, the overall performance of quality and growth of Private Sector Executives far exceeds that of LIC.

 “They set themselves apart from the giant LIC with their 10-year track record, approach to business, adaptability and dominance over the rich, yet the excitement surrounding LIC’s IPO is clear. Even if the stock is sold at a discounted price, Gupta says investors should not feel obliged to make the investment now.

 The government plans to sell more shares in Tranche in the coming years after the 5% sale.

Analysts believe that oversupply will keep stock prices low. “This type of Supply helps manage stock prices,” Roy explains. He further states that the price of the Offer is very important because IPOs take place in difficult market conditions. The situation in Ukraine has further increased anxiety. 

For context, see the contrasting fate of the monopoly of the previous stocks. Coal India shares fell more than half after listing, while IRCTC shares surged more than 300%. Over time, you will know in which direction the pendulum swings with respect to the LIC.

 

Article Proofread & Published by Gauri Malhotra.