Home / Opinion / Views /  5 likely reasons why LIC’s IPO valuation got trimmed

On Wednesday, secretary for Disinvestment and Public Asset Management Tuhin Kanta Pandey said the initial public offering, or IPO, of India’s largest insurer Life Insurance Corporation of India (LIC), due to be launched on 4 May, was right-sized, given the constraints in the market.

That is as good as signalling that the issuer, the government in this case, has been pragmatic or alive to the dynamics of the primary market in terms of demand, pricing and valuation. The government has now settled for divestment of a lower offcut (3.5%) of its holdings. The offer now is to sell 22.13 crore shares in a price band of 902 to 949 to raise over 21,000 crore, thus valuing LIC at a little over 6 lakh crore. That’s in contrast to the original plan to sell 5% of its equity to mobilize more than 60,000 crore last fiscal. The course correction may also have to do with the appetite and scrutiny of institutional investors, especially global ones, analysts and the volatility in the markets.

LIC may still be a dominant player in the underpenetrated Indian insurance market but hefty valuations may require weaknesses to be addressed over time. One, the listed private insurers provide a benchmark. Despite its large present market share, investors are bound to want to see the details of why LIC can be expected to command a premium over that benchmark. Present large market share cannot be the only reason for premium valuations; growth, and quality of future growth are important.

Two, private insurers have been steadily gaining market share, especially in the non-participating policies segment, a segment which is seen as more profitable because policyholders are not entitled to participate in the profits of the insurer in the form of bonuses or dividends. The government-owned insurer has a lower percentage of non-participating policies compared to its private-sector peers.

Three, while in an increasingly competitive market, the focus must increase on digitization to attract the generation of young customers, LIC’s distribution channels still rest primarily on an army of legacy agents. This contrasts with its younger peers whose model is bancassurance or distribution of products through banks besides other channels to keep expenses low. The productivity of LIC’s over 13 lakh agents is still good and although it is now planning to get on to popular digital platforms, the challenge cannot be understated. LIC’s average premium per policy per agent is lower. On the upside, their productivity is higher, as the number of policies sold annually is higher.

Four, LIC’s average premium or sum assured is much lower relative to the industry average, posing perhaps a risk regarding the quality of customers. There is a similar concern on this front given the insurer’s lower 13th-month persistency ratio. It can be argued all the same that it is the mass low-ticket size volumes that help spread risks unlike the case of many private insurers with much higher average premium or ticket size. Still, competitors are taking away the cream.

Five, LIC is under-capitalized and its solvency margins are also the lowest and funded from policyholder reserves. There are challenges also of modernization, accounting practices to ensure that investors aren’t in for a nasty surprise later considering its huge portfolio of assets. LIC’s books will begin to be scrutinized by analysts post-listing. There will be pressures on quarterly performance and peer comparisons and greater scrutiny of investors who won’t take kindly to the government dialling the institution to bail out its divestment programme or troubled banks, a routine practice so far.

Weighed against these five sets of concerns are LIC’s legacy strengths – the backing of the sovereign, trust and faith of millions of policyholders across the country, with an enviable franchise.

The government has said that the LIC IPO will be a long-term value creator for investors. There is the bait of a discount on the issue price, 60 for policyholders and 40 for retail investors and employees to attract more local investors to buy into this offering. That shouldn’t lead to large-scale flipping or selling post listing to cash in on gains as has been the case earlier. The liquidity of the stock with such a low float may also be a worry.

The government’s calculation may well be that setting a pricing benchmark through this offer will help divestment in tranches later, possibly within this financial year itself. But it must not forget that ultimately the promise of long-term value creation and realization of gains from disinvestment will depend not only on operational performance and governance but also on an enlightened owner who makes the distinction between ownership and management.

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