The Rs 21,000 crore initial public offer (IPO) of Life Insurance Corporation of India (LIC) to open for subscription on Wednesday. Ahead of the IPO, the public sector insurance behemoth has raised Rs 5,627 crore from anchor investors, allotting around 59.3 million shares to 123 investors at Rs 949 per share.
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While LIC policyholders are entitled to Rs 60 discount over the issue price, the retail investors will be offered the issue at a discount of Rs 45 per equity share. The minimum bid lot is 15 shares and in multiples of 15 equity shares thereafter.
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So, should you invest in India's largest public offer till date? Here's what brokerages suggest.
Valuations factor in most of the negatives. Expected improvements in product mix and greater transfer of surplus to shareholders account over the coming years are expected to drive profits from current low levels, which along with cheap valuations provide comfort. Moreover, the discount of Rs 45 and Rs 60 for retail investors and LIC policyholders makes the issue more attractive for them. Hence, we are assigning a subscribe recommendation.
Geojit Financial Services
Due to higher mix of non-linked and participating policies, LIC has a lower margin of 9.9 per cent as on FY21 compared to private players in a range of 20-25 per cent. Even though headwinds like declining market share, lower short-term persistence ratios and sub-par margins demand a discount to private players, the current valuation is attractive considering its strong market presence, improvement in profitability due to changes in surplus distribution norms.
At the upper price band of Rs 949, LIC is available at P/EVPS (Embedded Value per Share) of 1.1x, which is at a discount of 65 per cent compared to the average valuation of private life insurance players. We assign a subscribe rating on a short to medium term basis.
While the fact that LIC has been losing market share as well as its lower than industry value of new business (VNB) margins do instill apprehension, LIC has indicated its plans to improve the two. LIC aims to protect its market share through increased focus on bancassurance and enhancing direct sales of its products on its website. By improving its share of non-participating products and protection plans, it aspires to improve its margins. The long-term direction of LIC’s business and financial performance does hinge on good execution of these plans. Given the attractive valuation, the downside from here seems limited. We have a subscribe rating on this IPO.
Although LIC retains market leadership in India with around 64 per cent share in new business premium (NBP) as at end-September 2021, a dip in its share of individual business with nearly 44 per cent share is a clear disappointment. Our initial discussions with investors do highlight concerns over bureaucratic functioning, low margins, restricted free float, and weak profitability. Also, now with lower valuation and lower float, the stock will no longer be an index stock. However, the current pricing does mitigate most of these concerns and provides an attractive opportunity. We remain uncertain about initial listing gains, but do recommend the investors to subscribe to the IPO for a mid-to-long term investment horizon.
LIC being the largest and most trusted insurance company in India we are expecting to see a lot of first time investors especially from the Tier-2 and Tier-3 markets to participate in this IPO. What investors would look before investing in the LIC IPO would be penetration of LIC in markets untouched by the private insurance players. IPO seems attractive on the valuation front. We are positive on this IPO.