The mega issue of 22.13 crore shares in a price band of Rs 902-949 from Life Insurance Corporation of India Limited (LIC) opened on Wednesday (May 4) and would close on Monday (May 9). This issue is open for four days against the conventional three days that most issues are open. To cater to the large demand from retail investors, bidding will be allowed for the first time ever in any issue on Saturday (May 7). Further, bidding on the stock exchanges will be open on all days till 7pm against the conventional cut off time of 5 pm.
This issue has a reservation of 10 per cent each for Employees and Policyholders. Allocation for policyholders is the first of its kind and reflects the pride of place that the company has for people on the basis of which the company or corporation has been formed and grown over the last 65 years. There is a discount of Rs 45 per share for employees and retail investors. The discount for Policyholders is even higher at Rs 60 per share.
The issue is valued at 1.1 times its EV (embedded value) of 5.39 lakh crores. The issue is an offer for sale for 3.5 per cent of the corporation’s capital. Various combinations and permutations were thrown around for the valuation of the company. People had expected the valuation to be at par with the EV of other listed private players like HDFC, SBI Life and ICICI Prudential. What people failed to realise was that these companies have an operating history of just over 20 years and the combined size of all the private players put together is significantly less and just about a fourth of LIC’s size. A mature 65-year-old company cannot be valued at the same multiple as a young 20-year-old company.
Global conditions with the outbreak of war between Russia and Ukraine happened with the announcement of the LIC issue. To add to the pressure on the corporation, global markets have been rattled with inflation and looming shortages across the globe. Various options including postponing the issue were discussed. Finally, the government chose the option of reducing the size of the issue to a mere 3.5 per cent and kept valuations at a level where no one could complain.
What is LIC? It’s a financial juggernaut. It has an active agent base of 13.3 lakhs. It is the 5th largest insurer in the world in terms of life insurance premium for Fiscal 2021. It is the 10th largest globally in terms of total assets. The brand LIC is the 3rd strongest and everyone has grown up with the brand LIC. Their agents have sold 15.3 policies per year on an average. LIC sold 21 million individual policies and generated Rs 1,843 crs of new policy premium. LIC has the largest AMC in the country. They have an AMC of 40.12 lakh crores which is 1.1 times the AUM of the entire mutual fund industry. They are 15.6 times bigger than the 2nd largest AMC in the country. Currently they have 16 participating and 16 non-participating products on offer. They offer seven riders on the products.
The corporation has an AUM which is equivalent of 17.5 per cent of India’s GDP. It has 279.11 million policies in force as of 31st December 2021. The corporation had just one shareholder in the government of India and hence it paid 95 per cent of the profits to policy holders. Post this issue they have already decided and enacted that the pay-out for shareholders would be increased by 2.5 per cent each over the next two years to 10 per cent. This would mean a ratio of 90 per cent for policyholders and 10 per cent for shareholders, similar to what exists for global companies.
LIC also has a significant market share in health insurance and annuity products. The corporation had a share of 53.6 per cent in health insurance for the year ended March 21 and 76.9 per cent in annuity products respectively.
The company has an active portal and has become digital during the covid-19 period where it was able to issue policies with medical insurance online. The company’s expense ratio on a standalone basis is lower than that of the top five private players in India as a whole.
There is a commitment from the government or only shareholder that there would be no dilution for 12 months post listing. This ensures a comfort for shareholders that there would be no increase in free float. A period of one year is a fair time for price discovery post listing.
At the time of writing this article, midway through the first day, the issue has already received subscriptions for 0.44 times the IPO size. The policy holder category is subscribed 1.5 times. Expect the issue to receive excellent response in the retail, employee and policy holder buckets in the first few days, with HNI and QIB picking up on the last two days. There are more than 19 lakh applications which have been received and the issue is set for a new record in number of applications.
This is a must apply situation for retail investors as in future the dilution from LIC would be on screen as in other OFS which happen.
(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)
