Brokerages unanimously recommend investors to subscribe to the issue as LIC’s current valuations are attractive, considering its strong market presence, and strong sector growth outlook. The discount to private players is justified, given the declining market share, lower short-term persistency ratios and sub-par margins, they say.
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).
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.
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).