The next month-and-a-half could see Life Insurance Corporation of India (LIC) pouring in billions of dollars into the market to meet its investment target, but this time, its investments may come under closer scrutiny ahead of the proposed IPO.
LIC's equity investments have reached only 54.5 percent of this fiscal’s target of Rs 86,000 crore. These figures hold significance since the insurer is the largest institutional investor in the equity markets. When the valuation process begins for its IPO, these equity investments and their value will also be looked at.
In her Budget speech on February 1, finance minister Nirmala Sitharaman had announced that the government will divest stake in LIC through an IPO.
The IPO test
As LIC readies itself for an H2FY21 IPO, it is likely that the first set of books that will be scrutinised is its investment book. Being a large government entity, the insurer has a yearly target for debt and equity investment. But is that the right approach?
Also, since there were short-term concerns about losses in LIC's equity books, its future investments will be under a closer watch. The areas include sectoral investment caps, financial position of the investee firms as well as how much profits LIC is able to garner by buying and selling stocks.
The final valuation of LIC, which is now estimated to be valued at Rs 10 lakh crore, will depend on the kind of investment decisions it takes, be it its participation in government's divestment programmes, IPO investment as well as buying fresh stocks in companies it is already invested in.
Bad loans are already high for LIC, which is a core insurance company. LIC's gross non-performing asset ratio was at 6.10 percent for H1FY20.
However, LIC Chairman MR Kumar said that most of the investment is comprised of government securities, equity and a small portion of corporate debt. He added that LIC makes provisions for everything and the net NPA is just 0.04 percent.
In early FY20, there were concerns about LIC losing almost Rs 22,400 crore in the June quarter itself. However, over last three years, LIC has seen an almost 63 percent rise in the value of its equity holding. The value rose by Rs 74,781 crore in FY19 itself.
Data compiled by Moneycontrol showed that between June 2016 and June 2019, the value of LIC's equity holding rose by almost Rs 2.31 lakh crore.
The fact that LIC has reached only 54.5 percent of the yearly equity target could mean that the insurer is going slower in the stock market. Since it is now known that the government had been having discussions on the possibility of listing LIC, the insurer seems to be taking calculated risks.
But when it comes to its target for equity profits, LIC has achieved 94 percent of its Rs 24,700 crore FY20 target (as of January 31). On the other, its government securities investment touched Rs 2.81 lakh crore which was more than the set target of Rs 2.55 lakh crore. Being a life insurer, investment rules for firms like LIC mandate that a large portion of the corpus is put into guaranteed instruments like government securities.
LIC's investment target
The life insurer's target includes the equity investment under life insurance of retail portfolio as well as pension/groups schemes (P&GS).
Under the life (retail) portfolio, LIC had an equity investment of Rs 39,197.82 crore which was 52.26 percent of the target. Under the P&GS segment, LIC achieved 69.6 percent of the target with an investment of Rs 7,652.61 crore.
The March quarter (Q4) is one of the strongest quarters for life insurers like LIC because new policy sales are higher due to individuals buying products for tax deduction purposes. Hence it is likely that LIC will be able to be meet its investment targets.
Talking about the equity portfolio, LIC chairman MR Kumar at an event on February 7 said that there is some re-balancing happening. Data compiled by Moneycontrol showed that LIC's total equity holding value was at Rs 5.98 lakh crore at the end of the June quarter of FY20.
The policyholder funds of LIC are invested into both equity and debt instruments. Being a long-term business, a larger portion of the funds are invested into government securities and other guaranteed instruments.
The market value of LIC's investment as at the end of FY19 stood at around Rs 28.7 lakh crore, growing YoY by 8.6 percent. The insurer's total assets had touched an all-time high of Rs 31 lakh crore in FY19, which was a 9.4 percent rise.
While investing in the equity markets, LIC follows a 'contrarian' investment strategy, which is 'sell' when the sentiment is bullish and 'buy' when the mood is bearish.
For the April 1 to January 31 period, LIC collected new premiums of Rs 1.5 lakh crore, which was a year-on-year growth of 43 percent.
IDBI Bank stake
Among the large investments that LIC has, includes IDBI Bank where it holds 51 percent stake. In September 2019, the Cabinet announced that LIC will infuse another Rs 4,743 crore into the lender.
Over and above this LIC has already infused Rs 21,600 crore into the lender which is now waiting to come out of the Prompt Corrective Action (PCA) framework so that it can start lending again.
LIC has 12 years to reduce its stake in IDBI Bank. The insurer, however, is not keen to wait that long.
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