LIC IPO to turn the insurer into India’s largest listed financial firm

Mumbai: The government plans to sell as much as 5% of its stake in Life Insurance Corp of India in the biggest initial public offering in the country to raise up to Rs 65,000 crore, making the insurer the biggest listed financial services provider ahead of HDFC Bank.

IPO documents filed with the regulator indicate the insurance behemoth may be valued in the excess of Rs 12.5 lakh crore, making it more valuable than all other listed government-owned companies.

The government would sell 31.6 crore shares according to the documents.

When the IPO is complete, it would surpass the previous record set by Paytm’s owner, One97Communications, which raised Rs 18,300 crore last November, valuing it at Rs 1.5 lakh crore. Paytm’s shares have since slid nearly 58% from the IPO price.

The filing of the draft red herring prospectus is the culmination of more than two years of work at LIC and the Department of Investment and Public Asset Management (Dipam) after finance minister Nirmala Sitharaman announced the government’s plan to sell a stake in LIC in her budget speech on February 1, 2019.

The government stands to gain between Rs 62,000 crore and Rs 65,000 crore, which will help it achieve its divestment target of Rs 78,000 crore for fiscal 2022 — the target was lowered in the latest budget from the Rs 1.75 lakh crore estimated in the budget last year.

Divestment proceeds so far in fiscal 2022 have been poor at Rs 12,030 crore, coming from the sale of additional shares in NMDC and some government-owned shares of Axis Bank.

Earlier this month, the government approved the divestment of the 93.7 per cent stake held in Neelachal Ispat Nigam (NINL) by four central PSUs and two companies of the Odisha government to Tata Steel Long Products (TSLP) at an enterprise value of Rs 12,100 crore.

Depending on the valuation of LIC, the government is likely to exceed its revised target of Rs 78,000 crore for this fiscal, despite the strategic stake sale in Bharat Petroleum Corp and Shipping Corp of India not happening this fiscal year as planned.

Dipam-appointed actuarial firm Milliman Advisors has pegged the embedded value (EV) of the company at Rs 5 lakh crore. At a Rs 12.5 lakh crore valuation, LIC is being pegged at 2.5 times the EV.

EV is a measure of future cash flows in life insurance companies and the key financial gauge for insurers. Insurers are valued as a multiple of their embedded value.

“Based on the press reports, the government is expecting a valuation of Rs 10-15 trillion (lakh crore). At the lower end, LIC’s valuation could be 40-50% of private listed entities while at the upper end, the valuation for LIC could be at a 10-20% discount to private sector players,” Macquarie Capital Securities analyst Suresh Ganapathy said in a note last week.

In an interview with ET on November 12, LIC chairman MR Kumar said the insurer should command the same premium compared to the private sector because of its dominant market share and sheer volumes of policies sold.

“Investors must also consider that there is a sovereign guarantee which has not gone away. All this should add to the valuations not there for the others. Since 1956, we have never used this guarantee which is a huge comfort. We have never called upon the government to give us money,” Kumar told ET.

LIC, once listed, would become the fourth publicly traded life insurer in India, after HDFC Life, ICICI Prudential and SBI Life. It could also become one of the most valued companies in India with the likes of Reliance Industries, Tata Consultancy Services and HDFC Bank.

HDFC Life, the most valued life insurer, is being given a market valuation of Rs 1.25 lakh crore, more than four times its Rs 30,000 crore EV.

Two decades after private players began competing, LIC remains the dominant force with more than half the share in a market that is grossly under-penetrated.

The LIC IPO comes after a record 2021, which was the best IPO year — in terms of proceeds — for India in the last 20 years, EY said in its Global IPO report in December.

110 deals were executed in 2021, more than two times the 43 executed in 2020. The proceeds at $16.94 billion were more than four times the previous year’s $4.09 billion, the EY report said.

Ten investment banks — SBI Capital Markets, ICICI Securities, Kotak Mahindra Capital, Axis Capital, JM Financial, Nomura Securities, Bank of America, JP Morgan, Goldman Sachs and Citibank — are the bankers to the issue.

Though bankers do not expect LIC to be valued on similar lines as HDFC Life because of its sheer size and also due to its state ownership, which leads to a discount in valuation as government-owned entities have inherent issues like slower decision-making.

However, like State Bank of India, which enjoys a premium valuation among state-owned banks, LIC could also be receiving a better valuation than other state-run companies as it still retains more than half the market share and is implementing smart technology to rival private insurers.

Globally, insurance companies are valued at 2-2.5 times their EV. However, the valuation premium in India is higher because of the potential for growth, size of the Indian market and relatively under penetration of insurance in India.

India’s stock market has boomed post-Covid due to easy global liquidity and also helped by strong corporate earnings, which have attracted new investors to the market.

A record 34 lakh demat accounts were opened in January, and it may be another record in February as all brokers are racing to get LIC policyholders on board, ET reported earlier this month. One-tenth of the LIC issue size has been reserved for policyholders. Both LIC employees, as well as policyholders, will be offered a discount on the issue price.

The 30-share BSE Sensex hit an all-time high of 62,245.43 in October 2021. It ended Friday at 58,152.92.

LIC’s half-yearly results released last month showed its net profit zoomed to Rs 1,437 crore during April-September 2021 from a mere Rs 6 crore a year earlier, led by a sharp increase in income from investments, which compensated for a rise in benefits and bonuses paid and tepid net premium growth.

Income from investments in the first six months of fiscal 2022 rose 12% year-on-year to Rs1.49 lakh crore. This included its profit from the sale of investments, as well as interest, dividends and rent.

Net premiums increased to Rs 1.86 lakh crore from Rs 1.84 lakh crore a year earlier. The rise in profit came also despite an 8% year-on-year rise in benefits and bonuses paid at Rs 3.08 lakh crore.

“The total premium in individual pension (non-linked) grew by Rs 4,432 crore to Rs 5,636 crore, and that of the group (non-linked) grew by Rs 90 crore to Rs 66,295 crore. In H1 FY22, the total premium in individual life (linked) grew by Rs 737.08 crore to Rs 1,085 crore,” LIC said in a release.

Investments of policyholders have grown from Rs 5.9 lakh crore to Rs 37.72 lakh crore in the first half of the current fiscal year. The company’s solvency ratio was 183.37%, higher than the regulatory requirement of 150%.

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