scorecardresearchLIC IPO: An expensive valuation but what does the future holds for investors?
LIC's IPO launch will be the largest public offering in the history of Indian financial markets.
LIC's IPO launch will be the largest public offering in the history of Indian financial markets.

LIC IPO: An expensive valuation but what does the future holds for investors?

Updated: 29 Apr 2022, 08:44 AM IST
TL;DR.

In Fiscal 2021, LIC issued approximately 21 million individual policies in India, representing approximately 75% of the market share in new individual policy issuances.

The long-awaited Initial Public Offering (IPO) of Life Insurance Corporation (LIC) is finally to be opened on May 2 for anchor investors and from May 4 to May 9 for the general public.

The government has set the price band for the initial public offering (IPO) of Life Insurance Corporation of India (LIC) at 902–949 per share and may offer a discount of 60 to the policyholders, reported by Business Standard.

Retail investors and the employees of LIC, on the other hand, may get a discount of 45 on subscribing to the shares of India’s largest insurer, a senior government official told the business daily.

The board of LIC has approved the discount to be offered to the three categories, reservations for policyholders and employees, and the issue dates, the official added.

The government may sell 221.3 million shares, or a 3.5 percent stake in LIC, through the offering. This would help the government garner 21,000 crore, valuing the insurer at 6 trillion. The Securities and Exchange Board of India has approved the reduction in the issue size, the report said.

"All regulatory approvals for LIC’s IPO are now in place," the official told Business Standard.

Company Overview

LIC has been providing life insurance in India for more than 65 years and is the largest life insurer in India and also the largest asset manager in India as of December 31, 2021, with an AUM of 40.1 trillion, on a standalone basis which is 1.1 times the entire Indian mutual fund industry’s AUM.

The Life Insurance Corporation of India ("LIC") was established on September 1, 1956, under the LIC Act by merging and nationalising 245 private life insurance companies in India.

LIC has the largest individual agent network among life insurance entities in India, comprising approximately 13.5 lakh individual agents as of December 31, 2021,

The company operates globally in Fiji, Mauritius, Bangladesh, Nepal, Singapore, Sri Lanka, UAE, Bahrain, Qatar, Kuwait, and the United Kingdom.

For Fiscal 2019, Fiscal 2020, Fiscal 2021 and the 9 months ended December 31, 2021, on a consolidated basis, their premium from outside India represented 0.93%, 0.99%, 0.73% and 0.69%, respectively.

Product Portfolio

LIC has a broad and diversified product portfolio covering various segments across individual products and group products.

The company's individual products are comprised of participating insurance products and non-participating products, which include (a) savings insurance products; (b) term insurance products; (c) health insurance products; (d) annuity and pension products; and (e) unit-linked insurance products.

In Fiscal 2021, LIC had an 81.1% and 88.8% market share of group policies issued in India and during the 9 months ended December 31, 2021. It provides term cover products to both employer-employee groups and non-employee groups.

It also offers fund management and pension payment services to employer-employee groups wherein retirement benefits—gratuity, superannuation, and leave encashment liabilities—are managed by them under respective funded schemes.

The company also provides fund management services for group pension products under employer-employee pension schemes.

Competitive Strength

LIC is the largest life insurer in India in terms of GWP, NBP, number of individual policies issued and number of group policies issued for Fiscal 2021 and the 9 months ended December 31, 2021.

In Fiscal 2021, LIC issued approximately 21 million individual policies in India, representing approximately 75% of the market share in new individual policy issuances. The second-largest player in the industry issued 1.66 million individual policies and had a 5.9% market share for Fiscal 2021.

The brand value of LIC in 2021 was the US $8,655 million, with a Brand Strength Index (BSI) score of 84.1 out of 100, corresponding to an AAA- brand strength rating.

The trust in the brand "LIC" is evidenced by the 27.91 crore in force policies under individual businesses being serviced.

In India as of December 31, 2021. The trust in the brand "LIC" is further evidenced by the fact that approximately 75% of individual policies sold by LIC in India in the 9 months ended December 31, 2021, were sold to customers who had not purchased any life insurance policies from LIC prior to April 1, 2021.

Financials

LIC reported a net profit for the nine months to December 2021 at 1,756.97 crore. In FY21, the insurance giant had reported a net profit of 2,980.35 crore, and in FY20, profits were to the tune of 2,710.48 crore.

Financial Details* ( in Cr) As at Dec' 31, 2021(09)As at Mar' 31,
 2021 (12)2020 (12)2019 (12)
Share Capital6,325.00100.00100.00100.00
Reserves2,498.626,705.47891.66798.44
Net worth#8,230.506,514.64854.65815.33
Premium Earned285,341.93405,398.50382,475.52339,971.63
Income From Investments226,253.73285,520.42242,836.31225,043.54
EBITDA1,756.972,980.352,718.522,642.37
Profit After Tax1,715.312,974.142,710.482,627.38
EPS - Basic and Diluted(Rs)2.71^4.704.294.15
RoNW (%)20.84%^45.65%317.14%322.25%
NAV (Rs)13.0110.301.351.29
Source: LIC DRHP, Axis Securities    

Peer Comparison

LIC's listed competitive set includes HDFC Life Insurance, SBI Life Insurance, and ICICI Prudential Life Insurance, Max financial services. Unlisted players include Bajaj Allianz, Tata AIA, PNB Metlife, Exide Life Insurance, Aegon Life Insurance and others.

Name of the Entity (Financial Statements as on March 2021)Face Value/Equity share P/ENet Profit  ( Cr)EPS (Basic)EPS (Diluted)Net worth ( Cr)Return on Net worth (%)NAV/Equity Share (Rs)
LIC 10 -2,974.10 4.70* 4.70*6,514.6445.6510.30*
SBI Life Insurance  10 81.461,455.84 14.56 14.5510,400.4314.00103.99
HDFC Insurance  10 94.261,360.87 6.74 6.738,637.7215.7542.75
ICICI Prudential Life Insurance 10 81.83956.15 6.66 6.659,119.4210.4863.51
Source: LIC DRHP        

Valuation

LIC announced the price band of the IPO at 901-949 per share. The company said its earnings per share stood at Rs. 4.70 per share in FY21, and Rs. 4.29 per share and Rs. 4.15 per share in FY20 and FY19. Thus, at the upper limit of the price band at 949, the issue will command a valuation of 202 times its earnings, ET reported.

This is perhaps the most expensive in recent memory and makes the company more expensive than not just its peers but also the likes of Adani Wilmar, Dixon Tech, and IRCTC, the report added.

HDFC Life Insurance Company trades at 82 times its earnings, while ICICI Prudential Life Insurance Company is at 79 times and SBI Life Insurance Company at 78 times. The average PE of the life insurance industry is 80.

LIC's successful listing will also make it the most expensive government-owned company.

Among the most expensive PSU stocks are HMT (TTM PE: 176), India Tourism Development Corporation (174), Indian Railway Catering and Tourism Corporation (110), and National Fertilizers (51), Container Corporation of India (48), and Hindustan Copper (45).

Even globally, the issue is more expensive than its peers. An ET analysis shows Ping An Insurance and China Life Insurance – two of the biggest insurers in the world – trade at 0.54x and 0.21x embedded value. Even their PE ratios are in single digits. 

LIC is cheaper than AIA Group, Allianz Se-Reg, Zurich Insurance and all Indian life insurers in terms of embedded value multiple. This may provide some relief to many investors. 

"The near-term market volatility is likely to weigh on the stock performance, but we remain positive from the long-term perspective," B. Gopkumar, MD & CEO, Axis Securities, told ET.

"We believe investors should subscribe to the IPO for the long term, as 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,” he added.

Most analysts believe that the high valuation was not a concern for retail investors as the company is a leader in the industry with a dominant market share and commands a premium.

Future Prospects

It has a slew of investments throughout companies — private and public — that allows the company to grow organically while providing them with capital support. 

LIC has two subsidiaries and four associate companies that look after its pension fund, housing finance, mutual fund, banking, and cards business. LIC has the strongest network of agents in the country. As of March 2021, it had over 13.5 lakh agents across the country.

The company has a high disposable income, which can be put to use by investing in new-age companies.

LIC's penetration in rural areas was very high; 18% of its total business came from rural areas.

Key Challenges

LIC has to abide by the rules and regulations laid down by the government. This puts limitations on the growth of the company," says IIFL Securities in a research report.

It also said that the company has invested in many loss-making companies in the past due to policies laid down by the government.

It further mentioned the mis-selling attributes of LIC agents, saying the company doesn’t have a complete hold on the agents. "In order to gain personal interest, the agents mis-sell the customers with policies not required by them due to which LIC loses the customer’s trust," the report added.

By following traditional methods, LIC restricts its chances of catering to the young urban population. They do not have the liberty "to garner new technologies and means of distribution," says IIFL securities. 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

LIC top holdings in listed firms.
LIC top holdings in listed firms.
First Published: 29 Apr 2022, 08:44 AM IST