The stage is set for state-owned Life Insurance Corporation of India’s (LIC) mega initial public offering (IPO) in March. The insurance behemoth filed its draft red herring prospectus (DRHP) on February 13, preparing the ground for what is being billed as the mother of all IPOs in India. Moneycontrol's Preeti Kulkarni and Jash Kriplani spoke to Shyam Sekhar, founder of Chennai-based wealth management firm ithought Financial Consulting LLP, to find out how retail investors and policyholders should approach this investment opportunity.
Edited excerpts:
The DRHP for LIC’s IPO is out. What are the key takeaways from retail investors’ perspective?
The LIC IPO is a big opportunity for retail investors to participate in a public issue of this scale. Bear in mind that before coming up with the public issue, LIC made some changes that are investor-friendly and should be positive for its shareholders in future. So, in that sense, LIC is well prepared for this IPO and, after this, if the company improves its performance in areas where it is weaker, then there will not be much cause for concern for shareholders. It is a very decent IPO to invest in.
Could you elaborate on the changes that LIC has brought in?
So far, in the case of LIC, 95 percent of the profits went to policyholders whereas private insurers shared only 90 percent. Post-IPO (by FY25), LIC will give 10 percent of the participating profits to shareholders as also the entire profit from the non-participating category. This is a big change and a very positive development for shareholders.
What would you advise policyholders? There is no clarity on the discount, but what is the quantum you think would make it attractive for them?
Policyholders are likely to get a reservation of up to 10 percent of the issue size. Any discount between 5-10 percent would be a good discount. They have to bear in mind that the prime beneficiaries should have demat accounts, and only in their names, not joint accounts. The important thing for policyholders is to have demat accounts that carry the same name as the one on their policy documents.
What are the insurance valuation parameters that investors should track?
One is the embedded value of the business, which you can compare with peers and with its own historic valuation. The other is the value of new business (VNB). This is not a business you buy on EPS and P/E ratio. That is something people must take note of because a lot of people get confused with the EPS and P/E ratios. The multiple is usually on the embedded value of the business.
Also read: LIC’s tie-up with Policybazaar: Will it manage to attract millennial customers?
What is LIC’s valuation multiple likely to be?
Around 2.5 times is a reasonable valuation, provided that the business grows and new business is generated at a faster rate. If the company is able to increase its business in non-participating policies at a faster rate, then we should see these valuations sustain.
We had seen in recent issues that after the anchor book lock-in period is over, there is a large-scale selling. Do you think this could be a possibility even in LIC?
Large shareholder selling is a risk in every IPO. But, between the date of issue and the date of listing, not much is going to change in the market perception of LIC, because this is a well-discovered company. It’s a company with a long history. All the negatives are well-known to us, even before the IPO. So, why would somebody buy an IPO at let's say two-and-a-half times the embedded value and then try to sell it after the IPO at a lower valuation.
LIC is seen as an institution that is used by the government to bail itself out from tight situations. Is there also a perception risk?
The value of the investments LIC holds today, which has been disclosed, is reflected in the embedded value. So, all the past decisions of the government are already kind of factored in. What we need to see is the quality of the corporate governance the board will uphold in the future. So, the corporate governance standards of LIC will be as good as any other PSU in the future. And it will naturally be compared with its private sector peers.
There is certainly going to be pressure on the board to live up to what the market expects. What happened in the past was as an enterprise or corporation of the government. What should happen going forward should be as a competing, listed market enterprise with multiple stakeholders. These stakeholders’ interest is something that cannot be compromised.
LIC controls over 60 percent of the market (in terms of new business premiums), but its share has been slipping steadily. Will this impact the future performance of LIC’s stock?
LIC needs to become more efficient. It needs to be stronger in segments where it is now under-represented, like non-participating products, and it should have a better client mix, better product mix and a better market presence. All three things will have to happen. This is just the starting point of what the company needs to do to sustain its valuations and grow its valuations. If the company does all these things right, then it probably can be a big success story. But it needs to get its act together on these aspects. Investors should not worry too much about market share; see how the business is run, how risks are taken, cost of acquiring customers and VNB margins.
Will better market share in non-participating products and protection products improve VNB margins?
If LIC’s share in non-participating products increases, it should improve VNB margins. The base is low and the opportunity is large. With these improvements, when it comes on par with private players, the company should be able to compete far more aggressively.
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