Market busy doing the math on LIC IPO, enterprise value

MUMBAI: After failing to achieve it this financial year, the Finance Minister has vowed to bring out the much-awaited initial public offering of Life Insurance Corporation of India next financial year.

The Finance Bill 2021 has already laid the legal groundwork, and the government has sought Parliament approval for amending the LIC Act, which will allow it to revamp the life insurer’s board, streamline its accounting practices to align with the Sebi regulations and pump in Rs 25,000 crore in paid-up capital. In terms of the issue size of the offer, the Rs 25,000 crore in paid-up capital infused by the government could constitute total outstanding shares of 2,500 crore, if each share has a face value of Rs 10 each.

Given that the government has suggested selling up to 10 per cent stake in the life insurer, that will peg the issue size of the offer at around 250 crore shares. Out of that possible size, the government wants to reserve 10 per cent for LIC policy holders. LIC had 28.92 crore policy holders at the end of the last financial year, which implies that not all policy holders will be able to get their hands on a share of the life insurer, if the government keeps the issue size at 250 crore shares.

In terms of how much the government can raise, conservative estimates peg it at around Rs 1-1.2 lakh crore. And if that’s the worth of the 10 per cent stake, the valuation of the insurance behemoth could work out to be as much as Rs 12 lakh crore. At a market capitalisation of Rs 12 lakh crore, the price of LIC’s shares could work out to around Rs 480, nearly 50 per cent discount to the share price of SBI Life Insurance and about 44 per cent discount to that of HDFC Life Insurance.

Analysts, who cover the life insurance space, says opaqueness of LIC’s investments in several unlisted companies and its large land holdings and investments in perennially underperforming stocks of state-owned companies may not go down well with investors. Some analysts are valuing SBI Life at 36.1 times its 2021-22 earnings, whereas HDFC Life is valued at 87.7 times its one-year forward earnings. Replicating such rich valuations may be impossible for the merchant bankers of LIC issue, when they go about deciding the IPO price range.

While LIC’s web of investments is a thorny issue, the company is also not faring that well when it comes to fundamentals. Since the re-opening of the economy in June, LIC has consistently lost market share to the private sector. In the nine-month period ended December, LIC ceded 160 basis points in market share to the private sector. Its market share has fallen to the lowest level in two years after having risen 230 basis points in 2019-20, data compiled by JM Financial showed. That said, the PSU insurer still holds the lion’s share of the market thanks to a strong presence and an elephantine sales force all around the country.

Further, the investment community is also wary of the “investor of last resort” role that LIC has played in government disinvestment efforts over the past years, which may result in conflicts over governance standards.

"It remains to be seen how much the government will want to share with the public about the 'goose that lays the golden egg' for them,” said the chief investment officer with a city-based insurance company. While LIC IPO may create a lot of hype among investors when it hits the market later this year, the government will find it tough to sell a miniscule share of its family silver at gold-standard valuations.

Source: The Economic Times