The much-awaited LIC IPO is finally here. At an expected value of Rs 21,000 cr, this IPO is the biggest ever IPO in India, the next bigger IPO, was Rs 18,300 cr IPO of Paytm (NS:PAYT). The government had reduced the offer from 5% to 3.5% due to market volatility, at a price band of Rs 902-949. At a reduced valuation, the market capitalization will amount to roughly Rs 6 lakh crore.
The minimum lot size is 15 shares or Rs 14,235 at the upper price band.
Out of the total offer, 50% of the shares are reserved for Qualified Investment Buyers (QIB), 15% for non-institutional investors, and the remaining 35% for retail investors. The Government of India had declared that policyholders would be entitled to Rs 45/share discount while employees will get Rs 60 discount.
The Goliath
On September 1, 1956, the Indian Parliament passed the Life Insurance of India Act, which nationalized the Indian insurance industry. The state-owned Life Insurance Corporation of India was formed through the merger of over 245 insurance firms and provident societies. An IPO may be a significant milestone for a corporation since it allows it to boost significant funds and also improves the firm’s ability to develop and expand.
Although the insurance sector was opened for the private players in 2001, LIC still enjoys a dominant position in the sector. LIC’s assets under management (AUM) amounted to Rs 39.6 lakh crores as of September 2021, which is more than the AUM of the entire mutual fund industry. LIC controls a large portion of the individual and group life insurance markets. In FY21, for example, LIC had a 74.6 percent market share of individual policies issued and an incredible 81.1 percent market share of group policies issued. According to IRDA, the LIC individual agent network accounts for 55% of the total agent network in India.
LIC continues to dominate India’s life insurance market despite the existence of private insurers for over two decades. It has a 76.28 percent market share in terms of total policies and a 71 percent market share in terms of first-year premiums. However, market share alone does not dictate values, as evidenced by the fact that, despite being several times smaller, Bajaj Finance (NS:BJFN) has a larger market cap than SBI (NS:SBI). In terms of life insurance premiums, LIC is rated fifth in the world, and tenth in terms of total assets. It is the only Indian insurer among the world’s top ten.
Financials of LIC
Investment Thesis
Brand Value: LIC is one of the most trusted brands in India. It was recognized as the third strongest and 10th most valuable global insurance brand as per the “Insurance 100 2021 report” released by Brand Finance. The first-mover advantage and its strong position in the market make it suitable for long-term growth.
Market Leader: LIC is the undisputed market leader in key insurance segments. It commands a market share of 75% in new individual policy issuances. For the nine months ended December 31, 2021. LIC’s market share in the Indian life insurance industry was 61.4% based on NBP and 61.6% based on premium. This along with a huge AUM of ₹40.1 trillion which is 3.2 times the AUM of all private life insurers in India gives it a huge scope of growth in a country where insurance penetration is still very low.
VNB Margins expected to improve: VNB is the present value of profit expected to be generated in future years by the new business. It is the most important profitability metric for Insurance companies. LIC’s VNB margins at 9.3% in 1H FY22 were much lower than its private peers. But this is expected to improve as surplus distribution gradually equals with private players by FY25.
Any small shift in product mix from LIC’s traditional endowment plans to more profitable protection plans can also push VNB margins higher.
Valuations: LIC's embedded value was around ₹5.4 lakh crore. At a valuation of Rs. 6 lakh crores, the issue is priced at a Price to Embedded Value of 1.1x, which is a discount compared to its listed Indian as well as global peers. The valuation comparison with its listed peers is as follows:
Risks
Competition: LIC faces increasing competition from the private companies operating in the life insurance sector. It has ceded market share to these companies since the insurance sector was opened up to private players. From FY 2016 to FY 2021, the total premium for life insurance private sector players in the life insurance industry in India increased at a CAGR of 18% while LIC’s total premium in India increased at a CAGR of 9% for the same period.
Dependence on agents for new business: LIC’s individual agents procure most (94% currently) of its individual new business premiums. If it is unable to retain and recruit individual agents on a timely basis and at a reasonable cost, there could be a material adverse effect on its results of operations.
NPA Fears: The sharp increase in gross non-performing assets (NPAs) is a major source of concern. LIC’s NPAs are much higher than its private players at about 7 percent vs. an industry average of 1.5- 2 percent. This is partly due to LIC being asked to recapitalize ailing banks as well as bailout non-performing IPOs in the past.
Government interference: LIC has suffered from government interference in the past. Company has been govt’s go-to lender for all funding needs, has helped govt by capitalizing some PSU banks like IDBI Bank Ltd (NS:IDBI), and often provided funds to meet divestment targets (bailed out the IPO of Hindustan Aeronautics Ltd (NS:HIAE) in 2018), and has also invested in govt schemes like National Investment and Infrastructure Fund.
Important to remember
While LIC IPO is a significant achievement for the entire PSU ecosystem, it is also important to remember that IPOs need to be dealt with caution, especially in current volatile times as well as a series of IPOs that came out last year has significantly corrected below their listing price.
History suggests that the market had made top during the IPOs of Reliance Power (NS:RPOL) and Coal India (NS:COAL), and both these companies have failed to live up to their expectations. We all know what has happened to Anil Ambani controlled Reliance Power and where Coal India stands today compared to its IPO price.
LIC still sells more than 70% of the country’s life insurance policies and collects 65% of the new premiums, being cost-effective and having a massive penetration across the country due to its well-established agent system. Its operating costs are 10% lesser than the median of its top 5 competitors, with a network of 13.5 lakh agents spread across the country. LIC has an AUM which is 16 times that of its biggest competitor and more than the AUM of the entire mutual fund industry.
For investors, long-term value accretion will depend upon how LIC can address these concerns post a listing. Whether LIC can see a fate like Coal India, is difficult to say at this point. Coal India also had a dominant position in its business and launched one of the biggest IPOs. But the stock has failed to live up to expectations. Hopefully, IPO will give an opportunity to improve its financial and operating metrics.
These negatives don’t mean that LIC IPO will fail to live up to its expectations it could do very well in the near term due to the increased participation by almost all categories of investors, but in terms of market share and other fundamentals, it is surely losing out to private insurers like HDFC (NS:HDFC) Life Insurance Company Ltd (NS:HDFL), ICICI Prudential (LON:PRU) Life Insurance Company Ltd (NS:ICIR), and SBI Life Insurance Company Ltd (NS:SBIL).
Hence, before investing your hard-earned money in the LIC IPO, it is advisable to take a view of your SEBI Registered Investment Adviser (RIA).
Disclaimer: This article is purely for educational purpose.