LIC IPO Valuation Reduced; Still Biggest-Ever IPO In India; What Investors Need To Know

The valuation of Life Insurance Corporation is “fair and attractive” and the government expects significant participation of retail investors in the LIC IPO, DIPAM Secretary Tuhin Kanta Pandey said on Wednesday. The much-awaited initial public offering (IPO) is all set to open on May 4 and close on May 9.

The government has brought down the issue size from 5 per cent to 3.5 per cent due to adverse market conditions. Moreover, it has also cut the pricing of the issue. As compared to the earlier expected valuations of over Rs 10 lakh crore, the firm is now valued at Rs 6 lakh crore at the higher end of the price band.

The IPO size of LIC is Rs 21,000 crore, valuing the insurer at Rs 6 lakh crore. The state-owned insurer has disclosed its embedded value (EV) for the first time at about Rs 5.4 lakh crore. The embedded value is the sum of the current value of future profits and adjusted net asset value. It could be considered similar to book value but adjusted for future provisions and cash flows.

“While LIC valuations appear to be cheap as compared to listed private players, investors need to keep in mind that LIC has a lower VBN (value of new business) margin of 9.9 per cent in FY2021 as compared to private players who have VNB margins of 22-27 per cent due to higher share of participation and group product,” said Yash Gupta, equity research analyst, Angel One.

At the offer band, the LIC IPO is valued at a price-embedded value of 1.06-1.1 its September 2021 EV of Rs 5,39,686 crore, which is at a significant discount to listed private life insurance companies that trade at P/EV of 2.5-3.9x their December 2021 EV. While HDFC Life Insurance is trading at a P/EV of 3.9x SBI Life and ICICI Prudential Life trade at 3.2x and 2.5x their December 2021 embedded value, Gupta added.

“LIC IPO will not crowd out capital and monetary supply in the market. The initial public offering is right-sized, given the constraints in the market. The government has a long commitment to list LIC on the stock exchange and the listing LIC is a long-term strategic vision of the government,” DIPAM Secretary Pandey said during a press conference on Wednesday. DIPAM stands for the Department of Investment and Public Asset Management.

Pandey also said it will be the biggest IPO in India despite the reduced offer size of Rs 21,000 crore.

Even after the reduced size of Rs 21,000 crore, the LIC IPO is going to be the biggest initial public offering ever in the country. Till now, the initial public offering (IPO) of Paytm is the biggest one at Rs 18,300 crore in 2021, followed by Coal India Ltd at Rs 15,500 crore in 2010 and Reliance Power at Rs 11,700 crore in 2008.

The insurance behemoth has fixed the price band in the range of Rs 902-949 per share for the public offer. The government is offloading 3.5 per cent of its stake in LIC. So, around 21,000 crore shares of the company will be up for sale during the offer. The size has been significantly reduced in the wake of the Russia-Ukraine war and volatile market conditions across the world.

A significant portion of the upcoming LIC IPO, up to 22,137,492 equity shares or 10 per cent of the issue, has been set aside for the LIC policyholders, according to the red herring prospectus (RHP). Up to 1,581,249 equity shares or 0.70 per cent of the offer have been reserved for eligible employees.

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