Money on the table

LIC is seeking lower valuation

Public sector insurer Life Insurance Corporation (LIC) has opted for an initial public offering (IPO) with a substantial cutback in the number of shares on offer. The draft red herring prospectus (DRHP) filed in February targeted the sale of about 5 per cent stake, with the market purportedly valuing the insurer at 2.5-three times the embedded value (EV)— a standard metric for valuing insurance businesses. The government has now decided to divest a 3.5 per cent stake (about 221 million shares) at a valuation of just 1.1 times the EV and at a price-band of Rs 902-949 per share. Anchor investors start bidding on May 2 for their quota of 98.8 million shares, while the issue will be open from May 4 to 9 with the listing scheduled for May 17. Employees will receive a discount of Rs 45 per share in the segment of 1.58 million shares reserved for them. Policyholders will receive a discount of Rs 60 per share. As a result, instead of the February projections of a realisation between Rs 65,000 crore and Rs 95,000 crore, the issue will raise a little over Rs 21,000 crore at the upper end of the price band. This will still be the biggest-ever raising on the Indian primary market, and will go some way towards meeting the disinvestment target for 2022-23.

The reduction of the issue size was forced by the sudden worsening of sentiment due to the Ukraine war. The DRHP had to be followed by a share offer by May 12, or it would lapse. However, the sharp cutback in valuations is a surprise. Listed life insurers such as HDFC Life, SBI Life and ICICI Prudential Life Insurance trade at valuations of higher than 3x EV, so the valuation of LIC is relatively very low. This is especially glaring since LIC holds over three times the assets under management of all other life insurers combined. Moreover, EV calculations by definition don’t take the value of prime real estate controlled by LIC into account, which means the valuation of Rs 6.07 trillion is a significant underestimate. The IPO, therefore, leaves a lot of potential value on the table for investors. The realised money will go straight into government coffers.

This issue does set a troubling precedent in at least one respect. The Securities and Exchange Board of India has agreed to relax its mandatory requirement that an IPO should divest at least 5 per cent of the equity base. It is likely other closely-held public sector undertakings (PSUs) will assume similar relaxations if they too launch IPOs of less than the mandated 5 per cent of the float. The key to profitability for an insurer lies in how the premium received is invested. The premium collected is very low-interest (in money-back schemes) and long-term, or zero-interest (term plans). It can, therefore, be invested in long-gestation projects. About 24.8 per cent of LIC’s portfolio investments is in equity, with another 6.6 per cent invested in long-term infrastructure-related instruments. The rest is mostly in state or central government debt. LIC booked Rs 42,862 crore of profits from the sale of equities between March and December 2021 and around Rs 42,900 crore in equity sales in 2020-21. Unfortunately, LIC has been forced to bail the government out, time and again, when other PSUs have launched IPOs.  This has probably reduced its returns. As a listed entity, investors would hope for more transparency about LIC’s finances and about its investment decision-making.