LIC IPO: Brokerage View
The mega IPO of the state-run insurance behemoth Life Insurance Corporation of India (LIC) is slated to hit Dalal Street this week. The Rs 21,008.48-crore public offer will open for subscription on May 04 and the bidding will close on May 09. The anchor book, will open for a day before the issue, i.e. May 02 since May 03 is a market holiday in lieu of ‘Id-Ul-Fitr (Ramzan ID)’.
The price band for the insurance giant has been fixed at Rs 902-949 per share having a face value of Rs 10 per share. The company has announced a discount of Rs 45 for retail investors and its employees whereas the policyholders will get a discount of Rs 60 per share. The discounts will make the effective price based on the upper price band of Rs 904 for the retail investor and Rs 889 for its policyholders. No discounts will be offered to HNIs & QIBs.
Investors can bid for a minimum of 15 equity shares and in multiples, thereafter, translating to a minimum bidding amount of Rs 14,235 at the higher end of the price band. A retail investor can at max apply for 14 lots or 210 shares for Rs 1,99,290.
Not more than 50% of the total offer has been reserved for qualified institutional buyers, up to 35% for retail investors, and the rest 15% for non-institutional buyers or HNIs. Since the entire offer is an offer for sale (OFS). The Selling Shareholder (President of India acting through the Ministry of Finance, Government of India) will be entitled to the entire proceeds of the offer after deducting the offer expenses and relevant taxes thereon.
In the grey market shares of LIC are trading at Rs 1019 per share a premium of Rs 70 or almost 7.5%. The premium has almost tripled from Rs 25 on last Monday when the shares trading in the grey market. “The issue is priced at fair valuation as peer Competitors are available at 3x approx., LIC @1.1x, which is good enough for investors. The current market condition is very tuff and despite that government has done a wonderful job as far as valuation is concerned. There were chances to fail in LIC IPO and that’s why government reduced the prices. Now there is more room for investors on table,” said Abhay Doshi of Unlisted Arena.
At the upper price band of Rs.949, LIC is available at P/EVPS (Embedded Value Per Share) of 1.1x which is at a discount of 65% compared to the average valuation of private life insurance players. Even though headwinds like declining market share, lower short-term persistency ratios and sub-par margins demand a discount to private players, the current valuation is attractive considering its strong market presence, improvement in profitability due to changes in surplus distribution norms and strong sector growth outlook. Hence, we assign a “Subscribe” rating on a short to medium-term basis.
Based on life insurance premiums, India is the tenth-largest life insurance market in the world and the fifth-largest in Asia. The size of the Indian life insurance industry was Rs. 6.2 trillion based on total premium in Fiscal 2021, up from Rs. 5.7 trillion in Fiscal 2020. The industry’s total premium has grown at 11% CAGR in the last five years ending in Fiscal 2021.
LIC is a trusted brand and a customer-centric business model. It’s the largest player in the fast-growing and underpenetrated Indian life insurance sector. A cross-cyclical product mix that caters to diverse consumer needs and an individual product portfolio that is dominated by participating life insurance policies. LIC is present across India through an omnichannel distribution network with an unparalleled agency force. LIC has Highest RoNW amongst other listed players in India in the same industry.
At the upper price levels, the LIC has valued the IPO at 1.11 times its embedded value with a market cap of Rs.6,002 billion which we believe is quite lower when compared with the three listed peers like HDFC Life Insurance Co, SBI Life Insurance Co. and ICICI Prudential Life Insurance Co. where the average embedded value stood at Rs 3,105 billion and the average market capitalisation-to-embedded value ratio arrived at 3.4 times. Hence, the issue looks quite attractive to investors. Considering the largest size of the IPO Company’s well-diversified product portfolio, financial track records and bright prospects ahead.
Considering the Sept 21 Embedded Value of Rs. 53,96,860 mn, the company is going to list at a P/EV of 1.1 x with a market cap of Rs. 60,02,423 mn whereas its peers namely HDFC Life and SBI Life are trading at P/EV of 4.0x and 3.0x. LIC is the largest life insurer in India and a trusted brand with an established track record of financial performance and profitable growth. Also, it is available at a reasonable valuation as compared to its peers.
LIC is a market leader in the Indian life insurance industry with a strong distribution network and diversified product suite. The embedded value for LIC as of September 30, 2021, was at | 5.396 lakh crore. At the upper end of the price band, the company is valued at ~1.1x EV as on September 30, 2021.
Adverse variation in persistency metrics could have a material adverse effect on financial condition. Interest rate fluctuations and volatility in capital markets may adversely affect profitability. There is significant technical complexity involved in embedded value calculations and the estimates used in the embedded value reports could vary materially if key assumptions are changed.
Life Insurance Corporation (LIC) is the largest life insurer in India, with 61.6% market share in terms of premiums (or GWP), and 71.8% market share in terms of the number of individual policies issued as of December 31, 2021. LIC is synonymous with insurance in India and enjoys a phenomenal brand recall. We believe India’s highly underpenetrated life insurance space is still at a nascent stage and is attractively positioned to capture the huge growth opportunity. LIC enjoys many competitive advantages like strong brand value, extremely large scale of operations, a huge network of agents, and an envious distribution network. . The issue is priced at ~1.1 times Embedded Value, which is at a steep discount compared to its Indian & global peers. Nevertheless, first-time investors must be aware that the business of insurance is long-term in nature; and should be subscribed for the long term only.
Even post the listing, the government will still be the major shareholder and key manager, thus any future government intervention might be detrimental to shareholders. Insurance is a complex business for novice investors to understand as many terms are based on lots of estimates and assumptions, new investors will take time to get used to insurance terms like embedded value, VNB margins, APE, GWP, etc. There are concerns with the company like losing market share to private players, lower profitability & revenue growth compared to private players, lower VNB margins, and short-term persistency ratios. However, the company has made plans to address these issues and 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.
(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)
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