Imagine India’s largest IPO ever. A company born out of a collective merge and rising into an insurance giant, Life Insurance Company of India (LIC), debuted on the stock exchanges at Rs 865/share, a discount of 9% against the issue price of Rs 949 per share.
What led us here?
India’s GDP has suffered a lot due to the pandemic and now the economy is at an all-time low. COVID’s stringent lockdown pushed an extreme economic deficit, which affected millions of people and forced many of them into poverty.
To raise money government has listed many government entities for IPO, According to The Economic Times “The government has raised just 120.3 billion rupees by selling stakes in various state-owned entities this financial year, well short of its target of 780 billion rupees”. The LIC IPO is another effort by the government to raise money through privatization, which is needed to counterfeit the effect of the pandemic on the economy.
What exactly happened?
The statutory insurance and investment corporation, Life Insurance Corporation of India went public with its first IPO worth Rs. 21,000 crores on 4th May 2022. And it has been a rollercoaster ride of anticipation for investors and the markets ever since.
There were high expectations, as LIC is one of the largest and most well-known insurance companies in India. However, there had also been concerns about the company’s ability to meet these high expectations. In this blog post, we will take a look at the good, the bad, and the assumptions about the LIC IPO.
The Good
There are several reasons why the LIC IPO was seen as a good investment opportunity.
- First, LIC is a well-established company with a strong brand name. It has a large customer base and is one of the leading insurers in India.
- Second, LIC accounted for approximately 87% and approximately 91% market share in total maturity claims and annuity payments respectively in fiscal 2021.
- Third, LIC as an insurance company holds the top position in India with a market share of 64.1% by GWP for fiscal 2021.
The Bad
Concerns that were addressed:
- Not be able to meet the high expectations set by investors and the markets.
- Volatile stock market after the Russia-Ukraine crisis, and RBI could soon hike interest rates.
A state-owned enterprise, and its ability to operate independently after listing. - The company faces stiff competition from private sector players, who have been growing rapidly in recent years.
- Sustainability of LIC’s high levels of profitability, given the low-interest-rate environment.
The Assumptions:
- That the government will not exert undue influence over LIC after listing.
- That LIC will be able to maintain its profitability despite intense competition from private players.
Why did LIC decrease its IPO worth?
The initial decided size of LIC IPO was 65,000 crores but it was cut to 21,000 crores. The current price of 21,000 crores is only 1.1 times the embedded value which is two to three times less than what other companies are offering.
Cutting the price to one-third was taken because of negative market sentiment due to the Russian-Ukraine war global investors pulled out of investment in record numbers.
It is also assumed that the failure of the Paytm IPO was the major reason for the low valuation of the LIC IPO, Paytm was evaluated much higher than its revenue which led to its IPO failure.
Another reason for LIC’s low evaluation is losing market share to Private insurance companies in urban India. Record-breaking lowering of interest rates is also suspected as a reason because people are not looking at LIC for fixing their life insurance anymore.
Impact on other IPO
Looking at LIC’s status as the oldest and the most trusted insurance company in India the valuation was surprising because it was only 1.1 times its embedded value.
Companies who are planning to list for IPO in the future are concerned because LIC IPO might affect their valuation.
But LIC IPO was a case of high profile IPO listing after Paytm IPO failure which was evaluated as much higher than its revenue, it was better for LIC to keep the valuation low in order to succeed. That is why the market is most likely not going to be affected because of LIC’s low valuation.
Conclusion
From the moment LIC declared its IPO plans, it became the talk of the town and more so after filing its DRHP in February 2022. Investors across the board were busy working out its valuations considering its mammoth size of business and portion of the overall industry in the midst of the contest.
The valuation is the fail-safe measure to succeed for LIC IPO but it is not likely to affect other IPO in the future and Investors might consider putting resources into this super insurer’s maiden mini offer for medium to long-term rewards.
