LIC Valuation Cheapest Among Domestic Peers. What Prompted Government To Reduce Valuation? 

The Life Insurance Corporation of India’s (LIC) initial public offering (IPO) is all set to hit the street on May 4, 2022 and the issue will close on May 9, 2022. LIC has fixed the price band at Rs 902-949 per equity share for the issue. The share sale is through an offer-for-sale (OFS) of up to 22.13 crore equity shares and will be listed on May 17. 

Read here to find out more about OFS

Earlier, the issue was planned to be launched in March 2022 but got delayed due to unfavourable market conditions caused by the geopolitical scenario, especially the Russia-Ukraine crisis. Now the IPO is all set to launch in the next few days, and things have changed drastically since March.  

Earlier, the government had planned to raise Rs 60,000-65,000 crore through this IPO by diluting 5 per cent of its stake. Now, the government is raising Rs 20,557 crore by diluting 3.5 per cent of its stake entirely through an OFS route. However, despite the reduced issue size and valuation, the LIP IPO will still be the biggest IPO in India till date. 

Why The Smaller IPO? 

The big question here is: why has the government cut the issue size and made the valuation so cheap? The government has justified this decision and given an explanation. “The LIC share sale is right-sized, considering the present market environment. It will not crowd out capital inflows given the current constraints,” said Tuhin Kanta Pandey, Secretary, Department of Investment and Public Asset Management (Dipam), while addressing the media in Mumbai.  

Justifying the lower valuation, Pandey said 10 investment bankers and valuers did their best to get “an apple to orange comparison” since there was no benchmark to look upon.  

Market analysts, however, attribute the reduction to market volatility. “LIC valuation has been cut by half as the government is looking to attract more investors and is now looking to sell 3.5 per cent in place of 5 per cent. The major reasons (behind the) decrease in valuation are the ongoing volatility, global and domestic record high inflation and the war between Russia and Ukraine,” says Jitendra Upadhyay, senior equity research analyst, Bonanza Wealth Management.  

The market could be assigning a valuation discount to LIC versus listed entities (which trade at 1.1-1.5 x FY23 estimated price to enterprise value), owing to its traditionally savings-heavy business mix, lower operating leverage, high dependence on the agency channel. 

SBI Life’s market capitalisation stands at about Rs 1.10 lakh crore as on April 28, 2022. A back-of-the-envelope calculation pegs SBI Life’s market capitalisation-to-embedded value at 3.30 times. HDFC Life also has a market capitalisation-to-embedded value at 3.30 times. Note that most private life insurance companies are trading at about similar valuations of 2.5-5 times embedded value. Considering the scale and size of LIC, its valuation makes it the cheapest among its listed peers.  

It is worth mentioning here that LIC holds 64.1 per cent market share in the Indian insurance business in terms of total premiums collected and has a 66.2 per cent market share in terms of new business premiums (NBP). It also commands 74.6 per cent market share in terms of the number of individual policies issued, and 81.1 per cent market share in terms of the number of group policies issued for fiscal 2021. It has an enviable number of individual agents (1.35 million), which is 55 per cent of all individual agents in India as on September 30, 2021.  

When its valuation was higher, LIC was in a position where it could have dethroned Reliance from the top spot in market capitalisation. Now, it will be at number five. It is to be seen whether the lower valuation attracts investors, especially the retail ones, and how the stock will reward investors.