LIC IPO can add 20 cr investors: Motilal Oswal

The year 2019 was an exciting year for the initial public offering (IPO) market as majority of the issues have given good returns so far. The biggest name announced in the recent budget for divestment is the IPO of Life Insurance Corporation (LIC).

LIC is the country’s largest financial institution with assets under management of close to ₹31 lakh crore. During FY19, LIC had a market share of 75 percent in the number of new policies, 66 percent in first-year premiums and generated a net profit of around ₹2.6 lakh crore. It has also emerged as the largest institutional investor in the country with total investments of nearly ₹20 lakh crore. Thus, the government’s decision to monetise and allocate this resource to fresh infrastructure development and fill the budgetary deficit can be a historic decision.

The listing can make LIC one of India’s biggest companies in terms of market capitalisation along with Reliance Industries, TCS and HDFC Bank. The valuation of LIC is difficult given the absence of any embedded value-related data and adequacy of provisioning. However, a back-of-the-envelope calculation based on its current AUM and new business premium would suggest around ₹7-8 lakh crore. The government expects to garner more than ₹80,000 crore through a 10 percent stake sale in it.

Life insurance companies that have got listed in the past—SBI Life, HDFC Life, ICICI Pru Life—have attracted a huge interest from not only institutional investors but also retail ones given their consistent growth and healthy financials. The LIC issue is expected to become India’s biggest IPO ever. Given its sheer size, it could make stock exchanges quite broad-based and change India’s weightage and rating across various global indices, including MSCI.

The government can look to broadbase the participation of retail equity shareholders through this IPO—if it gives any incentive like special discount or create a reservation for its unit holders and employees, this could create higher interest and increase participation. LIC has about 3 lakh employees as of FY19 and 20 crore unique policyholders (individual lives covered) which is massive when compared to the around four crore retail demat accounts in India.

If we reflect back at the Coal India IPO, the retail offering was oversubscribed 2.1 times and more than 1.7 lakh retail investors applied for its shares, translating into total bids for 45.86 crore shares worth ₹11,235 crore. LIC is likely to raise about ₹80,000 crore. Assuming a 35 percent retail share, about ₹25,000-28,000 crore would be raised under the retail category which is 2.5x the participation in the Coal India IPO.

The disinvestment in LIC is likely to create one of the most valued listed entities in India. This would attract large foreign capital investment but the government should also take care to get enough retail participation.  The success of this company will go a long way in establishing the equity savings culture in the masses.