LIC IPO: Risks factors to consider before investing in India’s largest IPO 

The largest-ever IPO of the country from Life Insurance Corporation of India (LIC) is set to open from May 4. The issue will close on May 9. The price band has been fixed in the range of Rs 902-949 with Rs 45 per share discount on the cut-off price for retail investors.

Moreover, there is a discount of Rs 60 for policyholders, who bought their policy on or before April 13, 2022, the day LIC had filed its draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (SEBI). As per the revised plan now, the government will now disinvest a 3.5 per cent stake in LIC to collect approximately Rs 21,000 crore from the markets.   

Thus far, Paytm IPO (in 2021) was the largest ever IPO in the country at Rs 18,300 crore, followed by Coal India Ltd. (CIL) at around Rs 15,500 crore and Reliance Power in 2008 at Rs 11,700 crore. Given the size and its huge base of 29 crore policyholders, the IPO has generated a lot of interest among people.

One of the frequently asked questions is whether one should invest in LIC IPO? Is it overvalued or undervalued? Let’s take a look at its valuation and some of the concerns when it comes to investing in LIC IPO.  

First things first: its embedded value. This is important because for life insurers one of the most effective ways of calculation is through Embedded Value (EV) to arrive at their value. The EV is the total of the present value of all future profits from existing business plus net worth.

HDFC Life insurance company trades at around 4  times its embedded value. It recently also bought Exide Life at a valuation of 2.5 times for Rs 6,687 crore. The other two listed life insurance companies- SBI Life and ICICI Prudential Life get a market valuation of around 3-2.5 times their respective EVs. 

Also read: LIC IPO: FIIs have some concerns about mega public offer, says chairman

Market Cap to Embedded Value

After LIC came out with its DRHP on 13th February 2022, we at Business Today worked out that if the country’s largest insurer enjoys a similar valuation of 3-4 times like its peers then the company’s market capitalisation could be around Rs 16 lakh crore to Rs 21.58 lakh crore. At the conservative estimate on the lower multiple of 2 to 2.5 times the value was assumed at Rs 10 to Rs 13 lakh crore and the value per share worked out to Rs 1,706 and Rs 2,133. 

However, the initial estimate of around Rs 13 lakh crore market cap has been reduced to Rs 6 lakh crore due to the global economic conditions and based on factors like the market condition and the liquidity scenario.

So, at an estimated market cap of Rs 6 lakh crore, the issue is priced at a Market Cap to Embedded Value of 1.1x, which is at a discount compared to its listed India well as global peers which many experts believe has given global and domestic investors a fair chance to grab a bite compared to earlier pricing and valuation. LIC's embedded value is Rs 5.4 lakh crores as of September 30, 2021, according to actuarial firm Milliman Advisors.  

"LIC is synonymous with insurance in India and enjoys a huge competitive advantage in terms of brand value. However, there are concerns with the company like losing market share to private players, lower profitability and revenue growth compared to private players. But the valuation of 1.1 times Price to Embedded Value discounts the above concerns and policyholders getting a discount of Rs 60 makes this a bumper offer," said Santosh Meena, Head of Research, Swastika IInvestmart Ltd. 

Also read: No LIC FPO in next one year: DIPAM Secretary

Things to know before investing in LIC IPO

High share of Single Premium Policies 

Before investing in an insurance company one needs to look at what kind of business the insurer is writing. If the company is writing regular premium business there is an advantage because the customer has been locked for 20-30 years. If it is mostly into the single premium policy then the multiple is low.  However, in the case of LIC for the financial year (FY) 2021 around 82 per cent of the New Business Premium (NBP) is derived from just single premium products.  

The Red Herring Prospectus (RHP) of LIC states “For Fiscal 2019, Fiscal 2020, Fiscal 2021 and the nine months ended December 31, 2021, the New Business Premium (NBP) derived from our single premium products in India contributed 78 per cent, 67.49 per cent, 81.61 per cent and 82.53 per cent to our total NBP in India, respectively.” 

High share of participating policies

In India, a major portion of the premium goes into savings and investment products. A small portion of the business comes from protection plans. From shareholders' point of view, there is a lot of value in non-participating and protection plans because of higher margins. Insurers in India get a high valuation considering insurance penetration is very low in the country, hoping for a lot more exposure to protection plans in future.  

Participating products have variable returns, as these partake in the profits of the company. Non-participating plans comprise protection and investment plans with guarantees.  

Also read: LIC IPO: Listing to be 'high value enhancing in long term', says DIPAM secy 

In the case of LIC, a significant proportion of total new business premiums is generated by participating products, which can be a concern due to low margins for shareholders. The company however has announced its plans to focus on non-participating plans in future.  

According to LIC’s RHP: For FY 2019, FY 2020, FY 2021 and the nine months ended December 31, 2021, individual participating products contributed 67.05 per cent, 69.64 per cent, 62.13 per cent and 69.70 per cent to LIC’s total individual NBP in India.  

VNB Margin

One of the important ratios to keep a watch on is the Value of New Business (VNB) margin, as it indicates the profit margins of an insurance company. It is arrived at by dividing the value of new business by the year’s annualised premium. For example, if the VNB margin of a company is 10 per cent, it means that if the insurer underwrote an annual new business premium of Rs 100, the expected profit over the lifetime is Rs10.  

It is similar to the profit margin for any other business. Companies with high VNB margin is the indication of higher profitability of the company.  

LIC VNB margins come to 9.3 per cent as at and for the six months ended  September 30, 2021 compared to 21.9 per cent of SBI Life (9MFY22), 26.5 per cent of HDFC Life at (9MFY22) and 27.1 per cent of ICICI Prudential Life (9MFY22). 

One of the reasons for a low VNB margin is a high share of endowment plans in the product mix of LIC where operating costs are too high.  

Losing market share

Foreign institutional investors (FIIs) have some concerns about LIC’s IPO but global pension funds have "good interest" in the Indian state-run insurance giant's issue, the company's chairman said at Wednesday's press conference in Mumbai. One of the concerns could be LIC's growth prospects as it has been losing market share to private players.  

“Private sector insurance companies have been growing faster than us and gaining market share since their entry into the Indian insurance industry in 2001. From Fiscal 2016 to Fiscal 2021, the total premium for life insurance private sector players in the life insurance industry in India increased at a CAGR of 18 per cent while our Corporation’s total premium in India increased at a CAGR of 9 per cent for the same period,” according to LIC’s RHP.  

The market share of LIC has been declining as of 2019, 2020 and 2021 and in the nine months ended December 31, 2021, it had a market share of 66.4 per cent, 66.2 per cent, 64.1 per cent and 61.6 per cent, respectively, in terms of total premium in the Indian life insurance sector. “Accordingly, there can be no assurance that our Corporation will not lose further market share,” as per the RHP.    

Also read: LIC IPO: Here's what experts are predicting for India's biggest-ever public offer