There is a lot of buzz around the initial public offering (IPO) of insurance behemoth Life Insurance Corporation of India (LIC), which will hit the Dalal Street today, May 4, for individual investors. There seems to be a rush to grab a piece of the LIC IPO—15 fund houses have pumped in a little over Rs 4,000 crore in the IPO.
According to the data in LIC’s anchor book, “Out of the total allocation of 5.92 crore equity shares to the anchor investors, 4.22 crore equity shares were allotted to the 15 domestic mutual funds through 99 schemes.” This accounts for 71.12 per cent of the total anchor allocation.
Interestingly, of the total 123 anchor investors, 99 are mutual fund schemes across all categories. Among the top 10 mutual fund bidders, most are hybrid equity funds and large-cap funds. These types of funds are considered relatively safe in the equity category.
SBI Equity Hybrid Fund stole the show with the highest allocation of 9.22 per cent of the anchor investors’ portion. ICICI Prudential Value Discovery Fund and SBI Balanced Advantage Fund came in at the second and third spots with 3.91 per cent and 3.64 per cent, respectively.
A shift in the valuation makes LIC a large-cap company. With the change in distribution of surplus among policyholders and shareholders, there will be a cataclysmic shift in LIC’s valuations eventually. The first impact has already taken place: LIC’s embedded value has been calculated at a high Rs 5.39 lakh crore (as of September 30, 2021). In comparison, the embedded value of its PSU rival SBI Life Insurance stands at Rs 35,290 crore.
Embedded value refers to the current value of the company after taking into account future risks and profits. As LIC command a valuation of 1.10 times its embedded value, its market cap would be easily driven to over Rs 6 lakh crore, placing it among India’s top companies by market cap.
This gives fund managers confidence and also fits the investment criteria of large-cap and hybrid funds.
Lower Valuation Works For Value Funds And Others
Typically, value funds invest in companies that have a good business and are available at a discount to their fair value.
LIC has fixed its price band at Rs 902-949 per equity share for the issue. Considering the upper end of the price band of Rs 949, it is valued at 1.10x to its embedded value as on September 30, 2021. At this valuation, the insurance behemoth is the cheapest among domestic peers, which are trading in the range of 2.5x to 4.5x of their embedded value.
Should You Subscribe To The IPO?
The fact that mutual funds account for 71.12 per cent of the anchor allocation gives confidence to other investors as fund managers are known for identifying good companies and earning better returns for investors.
There are, however, some concerns too regarding LIC. One of the major ones is that it has been losing market share to private players. In addition to that, it has lower profitability and revenue growth than private players. “We believe that LIC’s distribution advantage, increasing sales mix of direct and corporate channels, and a gradual shift to high-margin non-participating products could be possible drivers for LIC’s future growth, negating lower-than-industry growth rates,” states a report by Investmentz, a broking firm by Asit C. Mehta. The firm recommends subscribing to the issue from a long-term perspective.
The report adds that at the upper price band, the stock is priced at 1.11x of its September 2021 Indian embedded value, which is at a significant discount to its listed peers. Currently, listed insurance companies trade at market cap to embedded value multiple of 2.5x to 3x, the report states.
Other brokerages hold a similar view. Nirmal Bang Securities, for instance, states that LIC’s Value of New Business (VNB) margins have the potential to improve. For the first half of FY22, LIC reported a VNB margin of 9.3 per cent compared to FY21 VNB margin of 9.9 per cent. Absolute value of VNB stood at Rs 41.67 billion for FY21 (Rs 15.83 billion for 1HFY22). “LIC’s VNB margin is on the lower side when compared to private sector peers. The VNB margin also reflects the par (participatory) dominated product mix. However, a meaningful scale-up in the non-par (non-participatory) products can improve margins substantially (going ahead),” a report by the brokerage house states.