Why the odds are against LIC as stock slumps 20% from IPO price

It was the public listing that everyone, from institutional investors with deep pockets to crores of Indian retail investors, had been waiting for.

It came, people applied in droves, it was oversubscribed nearly three times and got listed with much fanfare.

And then, it bombed.

Life Insurance Corporation (LIC) of India has been one of the most trusted symbols of independent India. Not only is it India’s largest insurer, it is also the saviour of the last resort for the government. Whenever the government has to bail out a failing bank or prop up the stock market, it calls in the insurer to deploy its seemingly never-ending piles of cash to save the day.

But the share market, it seems, has little faith in the insurer’s ability to retain its market share or indeed to grow as fast as some of its nimbler private competitors are expected to. Little wonder, then, that not only did the stock list at a discount to its IPO price last month, it has been falling ever since.

At its current levels of Rs 740-745 per share, the stock has fallen more than 20% since listing on May 17 after selling shares in its IPO at Rs 949 apiece. And this has meant that the insurer’s market capitalization has dropped below the Rs 5 trillion mark, to around Rs 4.7 trillion as on June 8.

In fact, the crores of small investors who were allotted the insurer’s shares and were looking to make a quick buck on listing gains, are now staring at the prospects of not even recouping their investment for a long while from now. Even LIC policyholders, and employees, who were given shares at discounts, are staring at losses.

Policyholders were offered a discount of Rs 60 per equity share, while retail investors and employees received a discount of Rs 45 on each share. This means LIC policyholders were allotted shares at Rs 889 per share, while retail investors got the allotment at Rs 905 per share.

But why is the market treating LIC so harshly, even as most other listed life insurers have actually risen over the past month, beating both the benchmark Senxes and the Nifty by a mile?

For one, because brokerages and institutional investors believe that LIC’s attractive valuations are more optical than fundamental.

‘The elephant that can’t dance’

In a recent note, brokerage firm Emkay Global Financial Services said that it had initiated coverage on the insurer with a ‘hold’ rating, with a price target of Rs 875 per share.

Emkay said that it was “neutral” on the counter and that its view was underpinned by the low value of new business relative to embedded value, low annual premium equivalent growth and margin prospects and inherent volatility in the embedded value of the company.

“LIC’s valuation on price-to-embedded value appears cheaper when compared with listed private players; this is justified by the fact that LIC adds merely 1.0-1.5 percent of EV each year from VNB, as against ~8-11 percent in the case of private life insurers,” Emkay Global said.

The brokerage thinks that LIC’s huge size hides the operational issues that it continues to face. “LIC’s dominant share in the single-premium group fund management business artificially inflates its market share and deflates some of its cost ratios,” it said in its note, referring to LIC as the elephant that can’t dance.

Emkay has valued the life insurer at 0.9 times its one-year forward price-to-embedded value, and has chosen to ignore any uptick in the embedded value from the future value of the new business.

“The overall EV returns are going to be lower and a mature life insurance company like LIC, with a large back-book and limited new business strain, should be valued closer to EV,” the brokerage said.

Emkay added that the unwinding rate, or the rate at which future cash flows are discounted, could be higher than that of private sector peers because of a large portion of equity investment backing non-participant policyholders’ liabilities.

“This is bound to result in higher volatility in EV, potentially feeding into the share price,” Emkay Global said.

LIC’s financials

Moreover, LIC’s recent numbers haven’t been impressive, and do not exude much confidence among investors.

Last week, the insurer reported a 17.41% year-on-year decline in its consolidated net profit for the fourth quarter, with the figure coming in at Rs 2,410 crore. This was down from Rs 2,917 crore in the same quarter in 2020-21.

Interestingly, this decline in net profit came even as LIC reported a 17.9% uptick in the net premium income for the fourth quarter, with the figure coming in at Rs 1.4 trillion, up from Rs 1.2 trillion in the same period a year back.

LIC's gross premium income for first-year premium rose 66.33% to Rs 14,663.19 crore on a yearly basis in the fourth quarter. Renewal premium income grew by 25.06% to Rs 71,472.74 crore, and single premium income jumped 80.72% to Rs 58,250.91 crore.

On top of these subdued numbers, what has perhaps also dampened investor sentiment is the fact that LIC is unlikely to become a dividend stock anytime soon, say like ITC or Coal India, which a retail investor can hold on to for the long term, in the hope of a stable income.

The insurer’s board of directors declared a dividend of just Rs 1.5 per share, which implies a negligible dividend yield.

Moreover, since the IPO was a truncated affair, the government diluted a stake of just 3.5% as against the initial plan of divesting 5%.

On top of this, the government may need to divest another 21.5% shares over the next few years, to meet the minimum public shareholding target. This will effectively mean that the government will keep offloading more shares in the open market, potentially depressing its price each time it comes up with an offer for sale.

LIC had raised Rs 20,557 crore via its IPO, but its market capitalization has already declined by a little under four times that amount.

A litany of woes

No one would have imagined that the insurance behemoth would meet such a fate when the government first announced plans to list LIC in February 2020, just before the coronavirus pandemic crippled the country’s economy and sent its capital markets into a tailspin.

Exactly two years later, in February 2022, the government filed draft papers with the market regulator, the Securities and Exchange Board of India (Sebi), for selling a 5% stake, to raise Rs 60,000 crore at a valuation of Rs 12 trillion. This was lower than the Rs 1 trillion the government had initially planned on raising two years back.

Then, in March the government again reduced the size of the stake dilution to just 3.5% as markets turned choppy in the wake of the Russia-Ukraine war and the monetary policy tightening by the US Federal Reserve. It also drastically cut down the valuation to just Rs 6 trillion, targeting raising just Rs 21,000 crore. 

Although the IPO did receive a strong demand from anchor investors, the stock has been in a free fall after the listing.

To be sure, the insurer may have been significantly overvalued by the government even after it halved the value it was ascribing to it. Even at the lower end of the estimate, its valuation was more than 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.

Also, the past performance of two other listed state-run insurance companies—General Insurance Corp and New India Assurance—hasn’t inspired 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.

At the heart of its myriad problems, remains LIC’s 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 anytime soon.

Moreover, as noted earlier, 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, even in its draft prospectus, the government had clearly said that it could ask the insurer to take actions that may be against shareholder interests, if the situation so demands.

And then there is the question of a huge network of more than 13 lakh agents, who bring in a bulk of the business for LIC. This is in stark contrast to its private peers who mostly operate digitally, and manage to keep their customer acquisition costs at the bare minimum.

Despite all of this, while most analysts remain optimistic of LIC’s market leadership, they prefer private sector peers with better growth and profitability outlook, thereby, generating higher RoEV.

In all therefore, it looks unlikely that LIC will be able to turn its fortunes around anytime soon, unless the government goes in for a drastic course correction to turn things around.

So, if you have been an IPO investor, you may need to wait it out in the sea for much longer still, before the tide turns favourable and brings you back ashore.