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Ahead of LIC IPO a look at some worrying spots

While the cheap valuation compared to peers is a positive, losing market share to peers, not all decisions taken by the largest life insurer in the country being sync with shareholders’ interests, weak digital presence, and accumulated losses of Rs 6,028 crore are worrying some analysts

April 30, 2022 / 07:37 AM IST

Life Insurance Corporation of India (LIC) will open its public issue for subscription next week with most analysts giving a ‘Subscribe’ rating to the issue, thanks to cheaper valuation compared to listed insurers. Anand Rathi, Religare Broking, Marwadi Financial Services and Samco Securities have given ‘Subscribe’ ratings.

However, some analysts are also cautioning investors against the pitfalls of investing in the country's largest life insurer.

LIC has been consistently losing market share to private peers. Currently, LIC holds 64 percent market share in terms of total life insurance premium. It grew at a compounded annual growth rate (CAGR) of 9 percent during FY16-21, while private insurers grew at 18 percent.

LIC has admitted that at times its actions at the behest of the government could be contrary to shareholders’ interest. Previously, LIC has bailed out the initial public offerings (IPOs) of Bharat Dynamics Ltd and Hindustan Aeronautics Ltd in 2018. The firm also bought IDBI Bank, which was reporting losses continuously due to a surge in bad loans. LIC had infused Rs 21,600 crore for 51 percent stake in IDBI Bank. In 2019, another Rs 4,743 crore was infused in the bank.


Another concern is that LIC doesn’t have a strong digital presence and 90 percent of its policies are sold by agents. The company’s draft papers showed that just 36 percent of individual renewal premiums were collected digitally, compared to over 90 percent for private players. Analysts said that if this trend continues, then total cost is likely to increase for LIC, going forward.

Investing in digital collection systems is a one-time cost, whereas physically investing in branches and resources to collect actual cash will be more expensive. Analysts are worried that persistently weak digital presence could keep costs high as agents typically receive high commissions.

Yet another worry is that LIC’s value of value of new business margin (VNB) as of September 2021 stood at 9.3 percent, whereas for the full FY21, it was 9.9 percent. However, other listed players like SBI Life, HDFC Life, ICICI Prudential Life, Max Life and Bajaj Allianz Life reported VNB margins of 11-27 percent. The VNB margin for all the players improved substantially during 2016 to 2021. Among the players in this set, HDFC Life reported the highest VNB margin of 26.1 percent in FY21, followed by Max Life with 25.2 percent.

LIC is also sitting on a mark-to-market (MTM) loss of Rs 6,028 crore. LIC said in its draft papers that of the Rs 11,265 crore worth of debt papers of mispriced insurance policies, papers worth Rs 5,351 crore are non-performing assets (NPAs) for which full provisioning has been done at an amortised cost, and if this transaction is shown in the balance sheet, LIC would have to show a loss of Rs 6,028 crore. Analysts are now watching how LIC will adjust this MTM loss in its balance sheet.

Aditya Kondawar, Chief Investment Officer at JST Investments said that despite the valuation being 1.1x price-to-embedded value, he would wait and watch on this IPO. LIC’s peers HDFC Life and SBI Life are trading at P/EV of 4.0x and 3.0x respectively.

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Ravindra Sonavane
first published: Apr 30, 2022 07:37 am
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