LIC IPO may have left a sour taste for first time investors

The government’s trimmed ambitions on the initial public offering (IPO) of Life Insurance Corporation of India (LIC) was hailed as a smart move  -- a move of pragmatism and leaving value for shareholders (something too few IPOs do these days).

Yet, almost a month after its listing, it is clear that the government, investment bankers and valuation vigilantes on Twitter should order their chef to put a humble pie on the lunch menu.

LIC shares have nosedived 25 percent from the issue price of Rs 949 per share after listing on May 17. The IPO of IPOs, India’s Aramco moment, the great exhibition of India’s capital market, has been a downer.

Also Read:  Why I gave the LIC IPO a miss

At this juncture, the question is not whether LIC, which was termed attractive by many generals of the valuation army on social media platforms, is a screaming value buy but if it is going to steal the crown from Paytm’s parent One 97 Communication as one of the worst IPOs of the pandemic era. That surely sounds ridiculous, for Paytm is down 72% from its listing price. But, LIC does seem like a strong contender for putting up a worse first-month show post-listing.

Paytm’s shares crashed 38 percent by the time the company celebrated its monthiversary as a publicly listed company in December 2021. LIC is down 25% thus far, with 7 days to go for the first month to close.

In hindsight, the argument for the steep decline in both LIC and Paytm, post their listing, boils down to their business fundamentals. Where Paytm was seen as a company having no focus, LIC is an old elephant that is no longer able to keep up with younger rivals. The big difference is Paytm was excessively priced with no track record or moat, and LIC was modestly priced for a company with significant moat and some growth.

Brokerages raise concern

Reputed broking houses, such as Macquarie and Emkay Global Financial Services, don’t believe LIC has what it takes to match the growth and vigour of an HDFC Life Insurance or even quasi state-owned entity SBI Life Insurance.

Both brokerages have raised concerns over the fact that the embedded value of LIC was propped ahead of the IPO through the inclusion of mark-to-market gains on its equity portfolio, which makes it vulnerable to volatility in the stock market.

A peek at the profit and loss statement of the insurer also shows emerging weaknesses.

In 2021-22, income from investments accounted for 40 percent of LIC’s total income in the shareholders’ account, which boosted the surplus of the company, and, therefore, overall profits by 39 percent.

LIC made profits of Rs 42,000 crore from just dumping its equity investments on retail investors who were eager to lap up anything and everything in a raging bull market last year.

This year, though, analysts believe profits from equity sales are likely to be marginal as global and domestic stock markets are caught in a perfect storm of high inflation, rising interest rates and slowing economic growth.

Market expert and founder of Motilal Oswal Financial Services Raamdeo Agarwal told CNBC-TV18 on June 9 that the stock market could remain stressed if nothing changes in the current macro-economic set-up.

What will anchor investors do?

LIC’s average decline in 19 trading sessions so far has been around 1.3 percent per session, suggesting that it could top losses of 30 percent from the issue price by the time it completes its first month in the market.

However, a joker in the pack is the upcoming end of the lock-in period for anchor investors on June 13. Anchor investors of LIC, a majority of whom are domestic mutual funds, are sitting on heavy losses. Will they cut their losses?

“Now, with the anchor book opening up, there could be more pressure on the stock. There is a possibility of another 10-15 percent downside on a technical basis since valuation-wise, the stock was attractive even during the IPO,” said Ambareesh Baliga, an independent market expert.

In that case, LIC’s stock could meet Paytm’s fate of seeing one of the worst value erosion in the first month of listing.

But if anchor investors stay the course, the country’s life insurer will be able to avoid an unwanted capital market milestone.

Either way, it will be no solace to that reluctant first-time investor, who tentatively bought the IPO because it was LIC – the most trusted name in finance.  For her, the first taste of the capital market was sour. But then, that should have driven home the very first lessons in investing: there are no guaranteed returns in the stock market, unlike in insurance policies.