With the mega Life Insurance Corporation of India's (LIC) initial public offering (IPO) finally launching on May 4, B Gopkumar, MD & CEO, Axis Securities in an interview with MintGenie said that investors should feel assured by the long legacy and the strong brand value that the LIC enjoys. From a long-term perspective, he is confident that LIC would be a good bet. Edited Excerpts:
With the LIC IPO finally launching in May, do you think this is the right time amid the market volatility?
The launch of the LIC IPO was primarily to help the government meet its divestment target. Amidst the market volatility led by geopolitical tensions, the IPO got delayed. Though the market volatility could weigh on the near-term stock performance, we believe investor interest in LIC will remain strong. From a long-term perspective, we are confident that LIC would be a good bet.
Do you think the LIC IPO becomes more palatable at the new valuations? Does the discount make it more attractive to retail investors?
The launch of the IPO is at attractive valuations, and at the upper end of the price band, the stock would trade at 1.1x market Cap/EV (trailing, H1FY22 embedded value) v/s the industry average of ~3x, thus making the stock attractive. Additionally, it is not only the discount offered to retail investors, which would deliver a marginally higher return, but also the assurance of owning a stock like LIC, a market leader in the life insurance space. A long legacy and a strong growth runway despite intense competition given the under-penetration (India’s life insurance penetration at 3.2 percent as per RHP) of the life insurance industry, along with higher protection gap, also makes the IPO more attractive.
Would you advise new investors to subscribe to the IPO?
There is a fair degree of interest in the LIC IPO from retail investors. We opened around 45,000 accounts for the IPO alone last month. Of these, 40 percent of customers are new to the market. We believe first-time investors should apply to the issue as it allows the applicant to invest in a market leader with a long growth runway. Given the skepticism around first-time investing, we believe investors should feel assured by the long legacy and the strong brand value that the LIC enjoys. Subscription to the IPO will assure first-time investors to directly own a stake in a strong brand across ‘Bharat’, given the powerful presence of LIC pan-India, especially in the rural and semi-urban markets. Investors should subscribe to the IPO for the long term. We are confident that the structural story for the life insurance industry remains intact as uncertainties during the pandemic have highlighted the benefits of life insurance.
A lot of the policyholders will also be very attracted to this with the discount they are getting a ₹60 discount?
LIC has put aside up to 10 percent of the shares in its IPO for its policyholders and plans to offer a discount to such investors. The discount offered will attract a lot of participation from policyholders as it allows them to earn higher returns.
What is the main selling point of the LIC IPO?
Fair and attractive valuations are the key factors driving the higher interest in the LIC IPO.
With LIC, the government still holds the majority of the stake, and the proceeds will also go to the government. Also, there are a number of private competitors? Do you see this as a risk? What are some other risks for this IPO?
We believe continued interference by the government is a risk as it may dissuade investors from placing their trust in the insurer. Additionally, competition from private players pursuing aggressive growth would pose a threat to LIC’s ability to maintain market share. Though in Q4FY22, we have seen a strong rebound in business momentum in terms of both NBP and APE, with LIC outperforming the private players, we believe a part of it was in anticipation of the IPO leading to higher policy sales.
Is there a chance that the IPO is overvalued like Paytm? Or could it go that way?
We believe valuations at 1.1x Mkt Cap/EV are attractive compared to the listed private players. Additionally, the discount offered to retail investors, staff, and policyholders will attract a good amount of investor interest in the issue. A comparison between PayTM and LIC would not be fair as LIC has a long operational history and enjoys a strong trust of policyholders, as reflected in the market share.
The IPO market has been dull for a while now, will the LIC IPO be able to revive the investor enthusiasm for the IPOs?
The investor participation and interest in the LIC IPO are likely to set the ball rolling for further primary market issuances.
How do you see the IPO markets in FY23, outperforming FY22?
Market volatility caused by geopolitical tensions in the Calendar Year 2022 impacted the primary market issuances. We believe that near-term headwinds will persist. However, as these challenges ease out gradually, we expect the IPO momentum to remain positive in FY23, as companies would like to raise growth capital from equity markets, given the boost in private investments across industries.
