Has LIC suffered conglomerate discount even before going public?

The price band for the initial public offering of the Life Insurance Corporation of India (LIC) has been set at Rs 902 to Rs 949, with a discount of Rs 60 for policyholders. For employees and retail investors the discount is likely to be Rs 40 per share. At the upper end of the price band the amount garnered is likely to be Rs 21,000 crore, a far cry from what was anticipated with a sense of excitement as India’s Aramco moment (the Saudi Arabian oil giant's IPO was raised $29.4 billion).

While successive trimmings of the size of the LIC IPO from 10 percent disinvestment to 5 percent, and then ultimately to 3.5 percent has robbed the IPO of its sheen and size, did the government get its valuations right, especially the LIC’s formidable investment portfolio?

All you need to know before applying for LIC's Mega IPO (Illustration: MoneyControl)

A company that has spread itself thin instead of setting store by core competence is bound to suffer the dreaded conglomerate discount sooner than later. Tata Consultancy Services (TCS) that was once a unit of the Tata family investment vehicle Tata Sons Ltd could become the market leader in terms of market capitalisation and find its true worth only when it emerged out of the shadows of Tata Sons (though the latter has ~72 percent stake in TCS). The point is the spinning off of TCS into a standalone company listed in the bourses was a moment of awakening.

LIC too has got investments in real estate that if allowed to stand alone would perhaps rise phenomenally and shine. It owns properties in Mumbai’s Fort and Delhi’s Parliament Street area that could be the envy of realtors. Its internal assessment in 2013 put a mammoth value of Rs 70,000 crore on its treasure trove that included real estate and MF Hussein paintings, which comes pretty much close to what the government was coveting from its 5 percent offerings through an IPO (strictly speaking it’s an offer for sale ).

Imagine how much Rs 70,000 crore would have appreciated into in 2022! Does the embedded value truly reflect the value of its treasure troves? Incidentally, as per its March 2020 internal assessment, the property value stood at $5.8 billion (Rs 44,42,075 crore roughly).

To be sure, a life insurer perforce has to have a long-term perspective given the nature of its business, and, hence, investments in real estate was perfectly in order. So, hiving off its real estate into a separate company would hurt the interests of policyholders. But that does not mean true and fair valuations should not be ascribed to this treasure trove.

In addition, LIC is a big player in the financial markets. Whether it is bonds or equities, LIC, alone, would dwarf the whole pack of foreign portfolio investors (FPIs) or any other investor category by a wide margin if one takes into account the yearly investments of the insurance behemoth. The total value of LIC investments was pegged at a whopping Rs 39.5 lakh-crore as on September 30, 2021.

LIC’s 3.5 percent stake for Rs 21000 crore translates into an enterprise value of Rs 6 lakh-crore on the basis of 1.1 times the embedded value i.e., the aggregate of its net asset value plus future discounted profits. Listed private life insurance companies such as HDFC Life, SBI Life, and ICICI Prudential Life trade between 2.1 to 3.1 times their embedded value. Indeed the government had, while filing the red herring prospectus, pitched for 2-3 times its embedded value.

All these raise one fundamental issue: has the government shown a tearing hurry in going through with the LIC IPO, making it a mooch ka sawaal (prestige issue)? The government could have allowed the war clouds to lift. Why should it indulge in self-effacement in the market? To be sure, it’s divesting just 3.5 percent stake, but the listing price would determine its market capitalisation. The current buzz is the hurry is not as much to raise funds for bridging the budgetary deficit, but to place LIC in the market where alone it can come for critical appraisal vis-à-vis its competition. Lofty ideal indeed, but is it the time for such grandstanding?

S Murlidharan is a chartered accountant and columnist. 

Views are personal and do not represent the stand of this publication.