If LIC IPO lists below issue price, investors should accumulate more: GEPL Capital MD Vivek Gupta

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26 Aug, 2025 12:21

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Retail investors should subscribe to the LIC initial public offering (IPO), as it “brings a combination of market leader at cheaper valuations operating in a double-digit growth industry", GEPL Capital MD Vivek Gupta has said.

The government is looking to raise Rs 21,000-crore by selling a 3.5 percent stake in the state-run insurer through India’s biggest IPO ever.

Gupta was not too worried about the slide in LIC’s grey market premium. If the price slips below the issue price on the listing day, it would make LIC more attractive and investors should accumulate more, he said in an interview of Moneycontrol. Edited excerpts:

Retail investors should apply for IPO, as this opportunity brings you the combination of market leader at cheaper valuations operating in double digit growth industry. LIC is India's leading life insurance company with 66 years history of operations. Its name 'LIC' is commonly used as synonym for life insurance.

India’s insurance market is not underpenetrated but it is under-covered. LIC has an opportunity to capture its strong brand recall and LIC operates in a growth industry as it is estimated that the life insurance industry is set to grow at 16-17 percent CAGR till FY26. Hence, one should consider applying in LIC IPO.

1) Embedded Value: The government has priced LIC IPO at lucrative valuations as it is pricing just 1.1X of embedded value (EV) of Rs 5.4 trillion. We have track record of listed life insurance player who commands a premium of 2-3X of embedded value. As you can refer to below mentioned table. HDFC Life trading at 4X (highest among peers) and SBI Life, ICICI Prudential Life are trading above 2X.

The average market capitalisation/EV of HDFC, SBI, ICICI Life players is 3, which is at a significant premium to the pricing of LIC. This leaves a lot of room for common shareholders to benefit from value appreciation post-listing. The arguments of falling LIC's market share could be factored in the valuations.

2) Price-to-earnings ratio: The PE ratio for LIC arrives at 200x, which, in our view, is misleading in this case as it is based on historical earnings. The earnings calculations are set to change due to division of Life Fund in two parts a.) Participating Fund b.) Non-Participating Fund with 100 percent claims by shareholders on non-participating funds and also the Fund going towards policyholders will be now 90 percent instead of 95 percent earlier. These structural changes are in sync with private players and hereafter will move more funds to shareholders' account than earlier hence will help to cool off the PE ratio.

1) VNB margin: VNB stand for value of new business, it is basically a profit margin of an insurance company and it is calculated as Ratio of VNB to APE (annual premium equivalent) for the relevant period and is a measure of the expected profitability of new business. The higher it is, better it is for the company.

2) Total cost ratio: It is the sum of the commission ratio and operating expense ratio. Ideally, lower is better for the company.

3) Persistency ratio: It is the proportion of the business that is retained from the business underwritten earlier. It is calculated for each year's policy renewal. For example, LIC has 79 percent persistency ratio for 13th month, which means 79 policies out of 100 are renewed after one-year of completion. The higher it is, the better it is for the company. Keep in mind that, the insurance business is a long-term contract where a policyholder pays the premium for several years, unlike other business where the customer purchase is limited to one time only. Hence, higher persistency ratio indicates strong relation of the company with policyholders.

4) Solvency ratio: It is the amount of the available solvency margin, which is in excess of value of assets to the amount of required solvency margin. It should be at least above 1.5x. For LIC it is 1.8x as of 9MFY22.

5) Policy mis-selling complaints: It is measured as mis-selling complaints filed by policyholders per 10,000. Lower is better for a company. For LIC, it is 2.1 per 10,000 complaints, which is the lowest among its peers.

Embedded value is a reflection of a company’s net present value of future business to shareholders. It is a widely used metric for valuing an insurance company. This measure considers future profits from existing policyholders only and ignores the possibility of the introduction of new policies. The embedded value is the discussion topic of the town as LIC IPO is here. It is complex to calculate, as it involves several assumptions and is calculated by professional actuaries.

Let us decode this. It is basically discounted cash flow of any insurance company which it is going to earn in the future in the form of premiums from existing policyholders plus the market value of its assets and reserves and surplus. Remember, the persistency ratio matters a lot in embedded value, as if the persistency ratio lowers in the future, it will affect EV calculations. The surrender ratio also considered in EV calculations.

The grey market premium for LIC on May 6 declined by nearly 50 percent than what it was before the issue started. The premium for LIC shares fell to Rs 42, which implies a yield of around 5 percent on the issue price. The reason could be attributable to the cautious sentiments of investors in the secondary markets due to a global market selloff.

We believe on the listing date if the price trades below the issue price, it will make LIC more attractive as the 1.1x Mcap/EV will get cheaper. Hence, investors should accumulate more if price falls below issue price.

We expect some pressure on LIC’s market share in the near term but don’t see it going below 50 percent, as it has a strong brand recall. It will take time for LIC's giant size to adapt to the market dynamics of new-age business strategies. As per RHP data, LIC is losing market share to private players.

In our view, the reasons lie in its agent-based model as LIC drives 93.8 percent of its business from agents. It has less presence on online web aggregators and digital marketing. The reach of agents is limited to two or one person at one point of time, whereas web aggregators or digital marketing can approach numerous people at a single time, which improves working efficiency and higher lead conversion.

Also, other listed peers are an extension of their parent banks and have accessibility to the bank account holders. However, as said by LIC's management in their live press conference, this is LIC 3.0, where LIC to adopt new-age business strategies.

Competition: Competition has accelerated post-COVID-19 as people are now more aware of the importance of insurance and the private players want to grab that opportunity.

Lower VNB margins: LIC has low VNB margin of 9.9 percent, which is at discount to its peers which have VNB margins above 20 percent. LIC’s product-mix is largely contributed by participating policy, which are generally with low margins.

Government intervention: LIC has bailed out several companies as per government instructions. We can expect more transparency post listing. However, the government will still control the rest 96.5 percent of the company unless it brings down to 75 percent.

Payout towards policyholders: As we discussed above, policyholders will now have no control over non-participating policies fund and they are going to receive less payout as much as 90 percent against 95 percent earlier. This will be interesting to see how LIC manages policyholders.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.