LIC valuations may be cheaper than global peers
For the last few months, the big concern over LIC IPO was that it was too expensive with respect to global peers. With reduced size and the lower valuations sought, the markets are realizing that LIC IPO may actually be a lot more attractive than its global peers.
You don’t typically value an insurance company on P/E ratio but it is valued more as the ratio of the market capitalization of the insurer to its embedded value. That is where LIC is now starting to look attractive. But first a few details on the IPO of LIC.
The LIC IPO is expected to open on 04th May and close for subscription on 09th of May, giving it a 4-day IPO time frame. The IPO price band has reportedly been fixed at Rs.902 to Rs.949 per share. However, the final price band will be announced on Friday.
LIC will now sell 22,13,74,920 equity shares instead of the original 31.2 crore shares, representing about 3.5% of its total capital base. That will be the OFS dilution by LIC. At this valuation, the LIC IPO size would be approximately Rs.21,008 crore.
Let us first look at the domestic comparison on the Embedded Value ratio. The valuation of LIC at the current IPO price would be Rs.600,228 crore. On an embedded valuation of Rs.539,686 crore. That gives a Price/Embedded Value ratio of about 1.11 times.
In comparison, Indian insurance companies like HDFC Life Insurance and SBI Life Insurance currently trade at 4.05 times and 3.10 times their embedded values. Even ICICI Pru Life is currently trading at 2.5 times its embedded value. That surely makes LIC relatively cheaper.
The table captures the Price Embedded value of global insurance majors.
|
Insurance Company |
Country of Origin |
Market Cap |
Price / Embedded Value |
|
Ping An Insurance |
China |
$119 billion |
0.54 times |
|
AIA Group |
Hong Kong |
$115 billion |
1.58 times |
|
Allianz Insurance |
Germany |
$95 billion |
1.89 times |
|
China Life Insurance |
China |
$89 billion |
0.21 times |
|
LIC of India |
India |
$78 billion |
1.11 times |
|
Zurich Insurance |
Switzerland |
$69 billion |
1.74 times |
|
AXA SA |
France |
$66 billion |
1.08 times |
What are the key takeaways from the above table. If you leave out the two Chinese insurance companies viz. China Life and Ping An Insurance, LIC is cheaper than all the global peers and at par with AXA.
One can always raise legitimate doubts about Chinese accounting standards and levels of accounting transparency. If you provide for that factor, LIC surely looks like a very reasonable bet for the Indian investors, even on a global scale.
One needs to remember that the initial valuation sought by the government was closer to $200 billion, which was later toned down to $150 billion and now that has also been almost halved to $78 billion.
Remember, LIC is a franchise that boasts of 25 crore policyholders and an unmatched network of over 14 lakh agents.
For an organization of that size, it has been surprisingly fleet footed, especially when it comes to the more complex aspects like adapting to the digital shifts. That should hold LIC valuations in good stead.
Once the stock of LIC lists on the bourses, it will be the fifth largest insurer in the world by market cap and will rank among the top-10 in India by market capitalization. To top up the story, the one fact that will cut the cake in favour of LIC is its incredible ROE of 82%.
Most of the other insurers cannot even match it by a fraction. That in a way justifies the three-figure P/E ratio of LIC, which does not sound outlandish if you look at the healthy ROE number.
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