• HDFC securities
• 29 Apr 2022
• LIC-IPO

India’s largest insurer and institutional investor, Life Insurance Corporation of India (LIC) is all set to launch its Initial Public Offering (IPO) on May 04, 2022. LIC, whose assets under management (AUM) ballooned to ₹38 trillion as of September 2021, is a behemoth in the domestic market, and a global giant too. It’s the first largest life insurance company and ranks 10^th in terms of AUM worldwide.

The Government of India plans to raise around ₹21,000 crores through this IPO, which is much less than earlier forecasts of ₹60,000 crores. Despite that, it is the biggest ever IPO in the Indian capital market. The IPO will open for subscription between May 04, and May 09, 2022.

Here’s what investors need to know.

Pricing of the LIC IPO

LIC has priced its shares in the range of ₹902 to ₹949 per equity share. Up to 10% of the company’s shares have been earmarked for policyholders. This amounts to around 2.21 crore shares. Ever since the IPO has been announced, over 6.48 crore policyholders have shown an interest by linking their PAN number with the policy details before the last date of February 28, 2022. Whoever among these participates in the IPO will get a discount of ₹60. For retail investors, and employees, the company will offer a discount of ₹45. A certain percentage of shares have been kept reserved for employees.

So if a retail investor is a policyholder as well, they can invest up to ₹2 lakh in the policyholder reservation category and ₹2 lakh in the retail category too. Any investor in the ‘non-institutional’ (HNI) category won’t get a discount.

A Demat account is needed for this investment. Successful bidders will be allotted the shares on May 12,  and unsuccessful bidders will receive the refund on May 13, 2022. The shares will be credited to the Demat accounts by May 16, 2022. By May 17, LIC will start trading on major bourses.

Lot Size for the IPO

The government has a 100% stake in LIC. Around 22.13 crore shares will be sold by it through the IPO. This equates to around a 3.5% stake in the company. The anchor book will open on May 2, 2022, and retail investors will be able to participate 2 days later. Investors can bid in multiples of 15 shares.

At the upper limit of the price band, a single lot of LIC shares will be worth ₹14,235 crores, devoid of any discount.

How Should Investors View the IPO?

Investors will need to know whether this IPO is priced correctly or not.

The LIC IPO has a valuation of ₹6.07 lakh crore. This valuation is approximately 1.1 times the embedded value of ₹5.4 lakh crore. This can be seen as much lower than the valuations suggested in initial reports, which stood at ₹15 lakh crore. But, that was just before the Ukraine-Russia conflict began in February 2022. This valuation reflects the market mood marked by China's slowdown, record-high inflation, and expected interest rate hikes from the US Federal Reserve.

Analysts say the present valuation is reasonable for prospective investors. Firstly, the price-to-embedded value parameter of 1.12 is accepted globally for life insurance companies. In contrast, some of the biggest listed private life insurers are priced higher. For instance, HDFC Life has a price-to-embedded value ratio of 4, while that of SBI Life stands at 3.

While the valuations of LIC IPO are cheaper compared to other listed insurers, investors need to take a look at the company’s VNB (Value of New Business) margin. It is calculated by dividing the value of the new business by the annualised premium in the year. So, if 10% is the VNB margin of a company, which means that the expected profit over the lifetime is ₹10 if the insurer underwrote ₹100 worth of new business premium. Companies with higher VNB tend to show higher profitability. LIC’s VNB stood at 9.9% in F.Y. 2021-22, lower compared to margins of 22 to 27% shown by some of the established private players in India.

However, LIC has a lot of strengths. In many categories on the business front, LIC doesn’t yet have a presence, which means further scope for new products and growth. It has a huge brand value in India, being synonymous with life insurance for the middle-class.  The name evokes stability, trust, and reliability.

It is difficult to predict the true value of a behemoth like LIC.