The Life Insurance Corporation of India’s (LIC) initial public offering (IPO) may get delayed due to the Russia-Ukraine crisis. However, when it lists finally, it may challenge behemoths, including Reliance Industries and TCS in terms of market capitalisation, thanks to a high valuation on the back of high embedded value.
What Will Be LIC’s Market Cap?
LIC commands around 65 per cent market share in terms of the total as well as new premium in India where insurance penetration is low. It has an enviable number of individual agents (1.35 million), which is 55 per cent of all individual agents in India as on September 30, 2021. It is also India’s largest institutional investor with 4 per cent stake in stocks listed on the National Stock Exchange (NSE).
Given the sheer size and reach of the insurance behemoth, the all-important question is: what will be the likely market capitalisation of LIC?
The two biggest factors that will help answer the question are how the embedded value of the company has increased due to internal changes in profit distribution among policyholders and shareholders; and the valuation of the company compared to its peers.
Read Outlook Money’s indepth coverage of LIC IPO’s valuation and share price expectations in the Special Story of the latest issue here.
Paradigm Shift In Valuation
There has been a major shift after some changes were made regarding LIC’s participating and non-participating policies. Before this change, LIC shared 95 per cent of its participating (par) surplus with policyholders leaving only 5 per cent for shareholders. Plus, LIC used to operate only one pool called ‘Life Fund’. That has all changed now. LIC will now share the entire non-par policyholders’ surplus with shareholders. It will also increase the shareholder allocation in par category surplus from 5 per cent to 7.5 per cent in FY23 and FY24 and finally to 10 per cent from FY25 onwards. All this in effect means that new shareholders will get the benefit of these changes.
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Aiming For A Higher Market cap
The above-mentioned changes will result in a huge shift in LIC’s valuations. First, it has already led to LIC’s embedded value rising to Rs 5.39 trillion (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. Interestingly, SBI Life’s market capitalisation stands at Rs 1.06 lakh crore. This pegs SBI Life’s market capitalization-to-embedded value multiple at 3.2 times. Note that most private life insurance companies are trading at about similar valuations, of 2.4-4.2 times embedded value.
Assuming that LIC can command a valuation of three times its embedded value, that should easily drive LIC’s market capitalisation over Rs 16 trillion (Rs 16 lakh crore). Interestingly, Reliance Industries has a market capitalisation of Rs 15.77 trillion (Rs 15.77 lakh crore), while IT behemoth TCS has a market valuation of Rs 13.04 trillion (Rs 13.04 lakh crore). If LIC is indeed able to command a good valuation, it can easily pip TCS to the second spot in the league of most valuable companies, and even challenge Reliance Industries for the top spot.