LIC IPO: Can India’s largest share sale really help investors make money?

It was the most awaited stock market listing in India in the current financial year, and was slated to be the biggest ever in the country’s history.

And now, it appears, the government-owned insurance behemoth Life Insurance Corp (LIC) of India will only see its stock market debut sometime in the next financial year, with just about two weeks to go before the current financial year comes to an end.  

The finance ministry hasn’t said anything officially yet, but if news reports are anything to go by, the government will wait until April or May, before coming up with LIC’s initial public offering (IPO) because of the market instability owing to the Russian invasion of Ukraine. 

The government wants the volatility index to come down and waters to be calmer, when it does come out with the listing. The NSE India volatility index is hovering around the 26 mark at present, while the government, reports say, is comfortable at it being around 15, when it launches the IPO.

The government has a window until May 12, when the draft prospectus filed with the market regulator, the Securities and Exchange Board of India (Sebi) expires. Any further delay will necessitate a fresh draft red herring prospectus, which could lengthen the process even further. 

This delay could significantly upset the government’s fiscal math for the current financial year, as it was hoping to mop up around Rs 65,400 crore ($8.5 billion) by offloading 5% shares in the insurance giant. 

To be sure, this is not the first time the LIC IPO is being delayed. Plans for the mega listing were first announced by Finance Minister Nirmala Sitharaman in her budget speech in February 2020.

However, the plans had to be shelved due to the Covid-19 pandemic, which sent the country into a national lockdown and the markets into a tailspin less than two months after her announcement. So, once the IPO does finally hit the market, the government would hope it has enough takers. 

LIC’s estimated market value

Moreover, once listed, LIC would be in the league of India’s most valuable listed companies like Tata Consultancy Services (TCS) and Reliance Industries Ltd (RIL), and will vault to being an index heavyweight from day one.

LIC’s embedded value—a measure of the consolidated shareholder value in an insurance company—was Rs 5.4 lakh crore as of September last year as estimated by global actuarial firm Milliman Advisors. 

The IPO prospectus does not mention LIC’s estimated market value. But the market valuation of other life insurance companies in India lies between 2.5 to four times their respective embedded values. That would put LIC’s market value anywhere between Rs 13 trillion to around Rs 22 trillion, or in the $170-280 billion range.

But is the insurer being overvalued by the government, which wants to extract the maximum value from an asset that has a pole position across nearly all the sectors in which it operates? Is the government leaving enough on the table for the investor to nibble at? Will LIC go the same way as several other public-sector companies like Coal India Ltd and Steel Authority of India Ltd, which have seen significant market erosion over the past decade?

There are no straight answers to these questions, although opinion among market watchers and analysts remains divided. One thing is clear, however. LIC’s market value will be far greater than any other insurance company in India.

In fact, even at the lower end of the estimate, its valuation would be more than thrice the combined market valuation of about Rs 4 trillion of the three listed life insurance companies, three health and general insurance companies, and one state-run reinsurance company in India.

On the flip side, the past performance of two other listed state-run insurance companies—General Insurance Corp and New India Assurance—doesn’t inspire much confidence. Both companies went public in late 2017 via IPOs that were heavily supported by LIC itself. And shares of both companies are trading far below their IPO prices.

Profit and premium

LIC’s finances have, at best, been a black box so far. The behemoth never needed to open itself to public scrutiny as it was not a listed entity, and numbers were often published with significant delays of even up to a year. 

But just last week, LIC released its numbers for the third quarter ahead of the listing. The insurer said that its December quarter profit after tax stood at Rs 234.9 crore, much higher than the Rs 90 lakh it had recorded as profit during the same period last year. 

This surge in profit happened following a change in its fund distribution policy, which allows shareholders and policyholders to receive a higher share in surplus. Interestingly, this also led to its embedded value jumping five-fold in just six months from less than Rs 1 lakh crore as of the end of March 2021 to more than Rs 5 lakh crore by the end of September that year. 

LIC said that its first-year premium for the quarter was at Rs 8,748.55 crore, up from Rs 7,957.37 crore during the same quarter last year, while the renewal premium rose to Rs 56,822.49 crore from Rs 54,986.72 crore last year. The total premium was at Rs 97,761.2 crore, up 0.8% from Rs 97,008.05 crore a year earlier. 

Interestingly, at Rs 40,939 crore, LIC’s new business premium for the quarter was actually down 3% over the year-earlier figure, while its annualised premium equivalent was up 5% at Rs 11,968 crore. The annualised premium equivalent is calculated to smoothen the differences between regular and lump-sum premiums. 

But these numbers do not reveal the full story. LIC has been steadily losing market share to more nimble-footed competitors, especially in the private sector, that have taken the online insurance market by storm. 

Falling market share

LIC’s own numbers show that its overall market share declined from 68.05% as of December 2020 to 61.4% a year later. And, there is nothing to suggest that LIC will be able to arrest this decline once it becomes a listed company. 

And so, market watchers remain sceptical. Some like Jeffries India even believe that the IPO could potentially disrupt market balance. 

Mahesh Nandurkar, an analyst at Jefferies, said: “Heavy foreign selling has been absorbed by strong domestic buying, smoothening the market impact. Potential LIC IPO can disrupt this balance.” He added that, hence, it is a near-term risk for the market, according to a news report that cited the investment bank’s analysis. 

What Jeffries is effectively saying is that an IPO so big could suck liquidity out of the domestic market, potentially leaving local investors with little money with which to invest in other stocks or IPOs. 

Another analyst, Vallabh Agarwal of Teji Mandi, says that LIC may not command premium valuations on listing as it continues to lose market share, and has low VNB (value of new business) margins, as compared to its competitors. 

For FY21, LIC's VNB margins were 9.9%. This declined to 9.3% for the first half of FY22. These figures are lower as compared to other insurers, whose VNB margins are in the range of 20-25%.

Moreover, the government continues to treat LIC as a funder of last resort, which is used to bail itself out, when all else fails. 

Consider the case of IDBI Bank, in which LIC infused Rs 4,743 crore from policyholder’s money, on top of the Rs 21,600 crore it had shelled out for a 51% stake in the struggling lender.

In fact, the LIC draft prospectus clearly says that the government may ask the insurer to take actions that may be against shareholder interests, if the situation so demands. 

So, in all, a huge network of agents, an asset book of Rs 39 lakh crore and its massive recall value will ensure good retail participation in the IPO, when it comes. But whether it will actually make the small investor some money in the long run, only time will tell.