IPO Size: Rs. 20,557 cr – India’s Largest Ever IPO
- Entirely offer for sale (OFS) by Government of India
Price band: Rs. 902-949 per share
- Policyholder discount: Rs. 60 per share
- Retail and employee discount Rs. 45 per share
M cap: Rs. 6 lakh cr, implying 3.5% dilution
IPO Date: Wed 4th May to Mon 9th May 2022, Listing Tue 17th May 2022
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
IPO Size Lowered
Earlier estimated Rs. 60,000 cr IPO size reduced to Rs. 21,000 cr (gross of discount) on 2 factors:
- Valuation halved from estimated Rs. 12 lakh cr earlier
- Offer size reduced from 5% stake sale to 3.5%.
LIC is the 5th largest insurer globally, based on gross written premium of Rs. 4 lakh cr for FY21. Its sheer size is daunting, with Rs. 40 lakh cr AUM being 110% of Indian mutual fund industry put together, with AUM of Rs. 37.6 lakh cr.
Trusted and Strong brand
Due to ‘sovereign guarantee’ on sum assured for all its policies (stays till govt hold 51% stake), LIC enjoys an unfair competitive advantage. Trust, built over 65 years, helps company command 66% market share in new business premium (NBP) India, even 20 years after entry of 23 private players.
Distribution is the backbone of insurance business and LIC has an army of 13 lakh individual agents, garnering 95% of its new business premium of Rs. 2 lakh cr annually. Despite being India’s oldest insurance company, LIC is young with 42% of agent network under 40 and 42% customers also under 40. Company is spreading the insurance culture in the country, with ‘new-to-LIC’ clients being 75% of policies sold during 9MFY22.
Share of the highest-margin protection products is below 1% for LIC vis-à-vis 10-20% for listed peers such as HDFC Life, SBI Life and ICICI Prudential. Hence, LIC’s value of new business (VNB) margin or profit margin of 9.3% is lower than +20% for above 3 peers.
‘Whatever It Takes’ Pricing
On all counts, Life Insurance Corporation of India IPO is at a throw away valuation, probably to get India’s largest IPO through, despite weak global liquidity and volatile secondary market conditions.
- On a historic Embedded value of Rs. 5.4 lakh cr as of 30.9.21, Price-to-Embedded Value multiple of 1.1x is extremely attractive, over 2.5-3.9x for domestic private listed life insurers HDFC Life, SBI Life, ICICI Pru Life. An Embedded value multiple of 1x implies no growth in new business in future, which is not the case, as LIC’s FY22 premium growth stood at about 8%. Even for 10 year, between FY11-21, LIC’s new business premium CAGR was 8%, higher than some private peers like ICICI Pru (5%) and Bajaj Allianz (6%).
- Even the VNB multiple (the PE equivalent in life insurance) comes to about 13x over 21-32x for peers, which adequately factors in lower profit margins and declining market share.
- Hypothetically, since LIC is India’s largest domestic institutional investor, with more products on the savings side, it can be valued as AMC + Insurance Risk Premium.
Market cap of Rs. 6 lakh cr is 15% of Rs. 40 lakh cr AUM. Asset management companies (AMCs) like HDFC and Nippon Life are ruling at 8-10% of AUM, despite smaller size, while 5-7% premium for insurance risk component is justified. Indian life insurers are trading at 32-57% of AUM, making LIC valuation lucrative.
With this pricing, it wouldn’t be unfair to say that Government has left no stone unturned to make the LIC IPO a wealth creation opportunity, especially for the ‘new-to-market’ investors.