LIC IPO all set to happen at much lower valuations

It suddenly looks like the government and the DIPAM are in a race against time to complete the LIC IPO before the 12th May deadline expires.

On the positive side, the government is now reconciled to selling a much lower stake, at a much lower valuation and being content with a much lower IPO collection from the LIC stake. Obviously, the old aggression in normal market conditions will not work when the market is under so much geopolitical stress.

The government was originally planning to sell 31.2 crore shares or 5% to raise Rs.60,000 crore. At that time, the LIC business had been valued at around Rs.12 trillion or around $160 billion.

However, due to the strain of the war, Fed hawkishness and the China slowdown, the government has decided to reconcile to lower valuations. This is likely to be positive for the IPO response as there would be more willing buyers at lower valuations.

As per the new DRHP filed by the government with SEBI, they will look to sell 3.5% stake in LIC for Rs.21,000 crore. This will value the company at Rs.6 trillion, exactly half the original valuation envisaged.

The valuation of $80 billion will peg LIC at much lower in the market cap rankings in India. Also, the valuation represents just about 1.1 times its embedded value (of Rs.5.4 trillion) as measured by Milliman Advisors early this year.

However, one line of thinking is that despite the 3.5% shares on offer, the government may retain a green shoe option to go up as high as 5% or even beyond that, in the case of adequate appetite for the IPO. This will give the government a lot more leeway in selling the IPO to the public.
 

If the IPO is not completed by 12th May, then LIC needs to see fresh approval from SEBI along with a fresh actuarial valuation report on embedded value.

That would mean that LIC will raise around Rs.21,000 crore without the green shoe option and around Rs.30,000 crore if the green shoe option is exercised.

For now, it does look like the final issue size will not be a multiple of the Paytm issue size, although the LIC IPO will still be the largest IPO in the history of Indian primary markets. This revised pricing, valuation and issue size was based on the feedback received from the road shows.

One of the advantages of the government being more reasonable in pricing the IPO of LIC is that it would leave something on the table for the investors. That will ensure that the government does not repeat the mistakes of the two general insurance IPOs in 2017.

At that time, the government had been too aggressive in pricing the IPO resulting in both the IPOs still quoting at a deep discount to issue price. That situation needs to be avoided.

Out of the total issue size, the reservation of 5% for the employees of LIC and 10% for the policyholders of LIC will continue as before. The allocation will be the normal allocation of 50% to QIBs, 35% to retail and 15% to NIIs.

The LIC IPO will be counting largely on retail support, thanks to its massive army of registered policyholders and its huge network of LIC agents spread across the length and breadth of India. 

The tempering of valuation had to happen in the current risk-off market. However, it is appreciable that the government has decided to go ahead with the issue, despite the risk of lower valuations and lower sums raised.

Hence a rationalization of the issue price and valuations was always on the cards. Going ahead with the LIC IPO, not only helps the government to get done with it, but also can trigger an IPO revival in primary markets.