LIC IPO takes centre stage; Should you subscribe despite these risks?

Market


LIC will be open for anchor investors tomorrow for bidding. While the IPO will be available publicly for subscription on BSE and NSE from 4th May to 9th May.

The IPO is purely an offer for sale (OFS) where the government will carry its strategic sale of 3.5% in the insurer. The total number of shares offered in the IPO is 22.10 crore equity shares.

The government seeks to raise about 20,557 crore from the IPO. The price band is 902 – 949 per equity share.

Under the IPO, 50% is reserved for qualified institutional buyers (QIB), 35% of the portion is kept for non-institutional investors (NII), and the remaining 15% is set for retail individual investors (RII). Also, 10% is proposed for policyholders. However, policyholders who have their updated PAN link with their LIC policies and hold a Demat account are eligible for subscribing to the IPO.

Although LIC will not receive any proceeds from this offer, the prime purpose of the issue is to achieve the benefits of listing shares on stock exchanges.

This government-owned insurer surely holds quite a significant leadership in the insurance industry. With more than six decades of experience, LIC is the largest insurer in India with a market share of 61.6% in terms of premium and a share of 61.4% e in terms of New Business Premium.

Not just that, LIC holds dominance with 71.8% market share in terms of the number of individual policies issued, and an 88.8% market share in terms of the number of group policies issued for the nine months ended December 31, 2021.

However, there are certain risks in the IPO as well that cannot be ignored.

LIC will compete against other private players namely SBI Life Insurance, HDFC Life Insurance, and ICICI Prudential Life Insurance on stock markets.

According to Geojit, LIC’s net premium is around 4,05,398 crore multi-fold times higher than peers SBI Life whose net premium is at 49,768 crore, HDFC Life at 38,122 crore, ICICI Prudential at 34,973 crore.

However, Geojit also highlights that in comparison to peers LIC’s earnings per share are lower at 4.7 per share versus SBI Life whose EPS is at 14.6 per share, HDFC Life and ICICI Prudential hold EPS of 6.7 per share each. Notably, LIC’s value of a new business (VoNB) is lower at 9.9% versus 20.4% of SBI Life, 26.1% of HDFC Life, and 25.1% of ICICI Prudential.

On the other hand, Return on Equity (RoE) is higher at 43% versus SBI Life at 14.4%, HDFC Life at 16.1%, and ICICI Prudential at 11.3%.

Analysts at Geojit in their research notes pointed out key risks for LIC. They stated that LIC is facing high competition from private insurance players, especially in the urban areas. Further, lower short-term persistency metrics also is one of the risks.

Among the key risks, Kajal Gandhi, Vishal Narnolia, and Sameer Sawant, Research Analysts at ICICI Securities highlighted that adverse variation in persistency metrics could have a material adverse effect on LIC’s financial condition. Further, interest rate fluctuations and volatility in capital markets may adversely affect profitability.

Also, there is significant technical complexity involved in embedded value calculations and the estimates used in the embedded value reports could vary materially if key assumptions are changed, as per the ICICI Securities.

Should you subscribe?

The majority of the analysts have recommended a ‘Subscribe’ to the LIC IPO because of its strong market presence.

Geojit analysts in their note said, “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% compared to the average valuation of private life insurance players. Even though headwinds like declining market share, lower short-term persistency 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, and strong sector growth outlook. Hence, we assign a “Subscribe” rating on a short to medium term basis.”

LIC’s market valuation stands more than 6 lakh crore, as per Geojit report.

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