The much-awaited initial public offering (IPO) of Life Insurance Corporation of India (LIC) will open for subscription on May 4. The state-owned insurance behemoth LIC has been a door-to-door name in India, and its IPO was the most talked-about topic on the D-Street.
LIC IPO is worth around Rs 21,000 crore, and it will be the biggest IPO in the Indian stock market history. The IPO values LIC at Rs 6.07 lakh crore. The government will sell a 3.5% stake or 22.13 crore shares in the company via the IPO, lower than the 5% planned earlier. The public issue will open for subscription on May 4 and close on May 9. The price band has been set at Rs 902-949.
LIC has reserved 2.21 crore shares, or 10%, for policyholders and 15.81 lakh shares, or 0.7%, for its employee in the IPO. The market lot size is 15 shares, and a retail-individual investor can apply for up to 14 lots. The anchor book will open on May 2.
What is LIC’s valuation?
LIC said its earnings per share (EPS) stood at Rs 4.70 per share in FY21. It was Rs 4.29 per share and Rs 4.15 per share in FY20 and FY19. At the upper price band of Rs 949, LIC’s issue will command a valuation of 202 times its earnings. The average price-to-earnings (P/E) ratio of the life insurance industry is 80.
HDFC Life Insurance Company trades at 82 times its earnings, ICICI Prudential Life Insurance Company trades at 79 times, and SBI Life Insurance Company at 78 times.
Meanwhile, the valuation of LIC is pegged at Rs 6 lakh crore, which is around 1.1 times its September 2021 Embedded Value (EV) of Rs 539,686 crore. This is at a significant discount compared to the Price/Embedded Value (P/EV) of its listed peers.
The other insurance companies HDFC Life, SBI Life and ICICI Prudential Life Insurance trade at valuations of higher than three times the EV even though LIC holds more than three times AUM off all these life insurers combined. Therefore, LIC IPO seems reasonably valued with respect to its size and dominance in the insurance sector.
Should you invest in LIC IPO?
The government reduced LIC IPO size to Rs 21,000 crore from Rs 65,000 crore earlier. After the reduction in valuation, market participants believe LIC IPO has become more attractive.
LIC still has a lot of inherent strength and massive growth prospects as it has a scope to explore into the business in which it is not present. LIC still maintains around a 60% market share.
Meanwhile, the market’s crazy bull run witnessed over the last year has now cooled off. Hence, market participants believe LIC IPO can be a good opportunity to invest with a medium- to long-term view.
Key things to consider before investing in LIC IPO:
The retail investors and employees will get a Rs 45 discount, while policyholders will get a Rs 60 discount, provided their PAN Card is linked to the policy.
As per regulations, the maximum bid amount under retail, policyholder and employee quotas cannot exceed Rs 2 lakh. However, if a retail investor is also a policyholder and an employee of LIC, he can bid under all three categories separately. Hence, his effective aggregate limit will be Rs 6 lakh.
Even an individual with only one LIC policy can apply for LIC IPO under the policyholder reservation portion. The policyholders will also get a discount of Rs 60, provided their PAN Card is linked to the policy. The last date for linking policy with PAN was February 28.
However, those covered under group insurance policies will not be eligible under the policyholder quota. Policyholders also should ensure that they have a demat account that matches with the PAN linked to the LIC policy.
As per LIC DRHP, the company’s total cost ratios stood at 33% in H1FY22. This is higher than top 5 private sector peers which have a median of 19% total cost ratio. LIC’s 13th month persistency rates was at 79% vs. a range of 81%-86% for the peer set.
LIC’s Value of New Business (VNB) margin for FY21 stood at 9.9% and H1FY22 at 9.3%.
Risks factors to consider before investing
- Adverse persistency metrics or an adverse variation in persistency metrics
- Higher surrenders and lower persistencies
- Interest rate fluctuations
- An unanticipated amount in mortality claims from COVID-19 pandemic
- An inability to retain, recruit individual agents
- Competition from private insurers
How to apply for LIC IPO?
You can apply for the LIC IPO in these ways:
Link your personal bank A/C to a trusted UPI ID and map it with your TradeSmart account. Now, proceed further to book your IPO. On acceptance of the mandate, the bid amount will get blocked in your bank account. Learn more.
- If you are an Existing TradeSmart Demat account holder and wish to apply for LIC IPO. Click here.
- If you don’t have a TradeSmart Account? Sign up.
Who are Anchor Investors?
Anchor investors are marquee institutional investors who are allotted shares at a fixed price before the IPO opens. This is done to show healthy demand for the IPO and popularise the issue. This process helps build confidence in retail investors.
When will the LIC IPO Anchor book open?
LIC IPO anchor book is scheduled to open on May 2.
What is LIC IPO promoter holding and how will it change post-IPO?
LIC is 100% owned by the Government of India and after the IPO, the government holding will come down to 96.50%.
What is P/E Ratio?
The P/E Ratio, known as the price-earnings ratio, is the ratio of a company’s share price to the company’s earnings per share. The ratio is used to value companies and find out whether they are overvalued or undervalued.
What is Embedded value (EV)?
Embedded value (EV) is a common valuation measure used mainly by life insurance companies to estimate the consolidated value of shareholders’ interest in an insurance company. Embedded value is calculated by adding the present value of future profits of a company to the net asset value (NAV) of the company’s capital and surplus.
Disclaimer: This article is for information purposes only and should not be considered as stock recommendation or advice to buy or sell shares of any company. Investing in the stock market can be risky. It is therefore advisable to research well or consult an investment advisor before investing in shares, derivatives or any other such financial instruments traded on the exchanges.