LIC IPO | The headwinds that could dampen the listing

The much-awaited divestment of the Life Insurance Corporation (LIC) of India has been initiated with the draft red herring prospectus (DRHP) being filed with the Securities and Exchange Board of India on February 13.

The market grapevine is that the initial public offer (IPO) is likely to run between March 10 and 14. LIC’s listing is crucial for the government to meet its revised target of Rs 0.78 lakh-crore for the current fiscal. The government has so far realised Rs 0.12 lakh-crore from the privatisation of Air India and other CPSUs against the budget estimate of Rs 1.75 lakh-crore.

Being the sole owner of LIC, the government holds ~6.3 billion shares. The government plans to dilute its 5 percent stake (or 316.25 million shares) through an offer for sale (OFS). The government hopes to raise about Rs 0.6 lakh-crore to bridge the gap of fiscal deficit.

Meteoric Rise

At present, there are 24 life insurance players in India along with the LIC as the sole public player. The size of life insurance business on a total premium basis has risen by 8.77 percent, and jumped to Rs 6.2 lakh-crore in fiscal 2021 from Rs 5.7 lakh-crore in 2020. It is expected to reach Rs 12.4 lakh-crore by fiscal 2026. Total premium in the industry has grown at 11 percent CAGR in the five years ended fiscal 2021, and is expected to grow at 14-15 percent CAGR over the next five years.

In the first half of the current financial year, LIC’s net profit stood at Rs 69.39 crore (p 307). Its net profit stood at Rs 191.31 crore in FY21 against a net loss of Rs 11,763.38 crore a year ago (p 309). Evidently COVID-19 affected LIC’s business numbers: it heightened the risk, reduced the sales, increased expenses through claim settlements, and adversely affected LIC’s investment portfolio. The embedded value — the present value of future profits plus adjusted net asset value — of LIC was calculated at Rs 5.39 lakh-crore in September 2021. It was at Rs 0.96 lakh-crore at the end of fiscal 2021. Given this, million-dollar question is: how did the embedded value increase by 5.65 times in six months (p 181) while a pandemic and its related economic pressures are still raging.

Troubled Forecast

Some reports suggest that this might not be the best time to bring in the IPO. The success of LIC IPO would be dependent upon the performance of the capital market. The Indian equity market touched new heights in 2021, and was the top performer among global peers due to favourable macroeconomic conditions, strong corporate earnings, and inflows from retail investors.

The year 2021 was the best year for both Sensex and Nifty since 2017. Sensex reached an all-time high of 62,245 points on October 19. As a result, corporates raised a record amount through IPO from the primary market. The government’s earning from corporate tax increased by 16.1 percent against budget estimate, and jumped to Rs 6.35 lakh-crore in FY22, and this is expected to reach Rs 7.2 lakh-crore in FY23. The market, however, ended the year volatile, and pulled back from its October peak. Sensex closed at 58,23.82 points on December 31.

However, there is a possibility that 2022 will see opposite to 2021. According to HSBC, FII flows will go back to China from India in 2022, compared to 2021 when money flowed from China to India. On February 14, the stock market witnessed its biggest single-day fall in the last 10 months. The equity market crashed 3 percent amid the escalating tension between Russia and Ukraine, which has put oil prices on the boil. On February 17, brent crude hit $100 a barrel for the first time since 2014, and both Sensex and Nifty plummeted 3.25 percent in the last 30 minutes of trading. Such is the choppy nature of the market.

International Pressure Points

On the other hand, the US Federal reserve is expected to hike interest rates sooner than expected at the time when accelerating inflation can also upset the market. A hike in interest rates in the US will negatively impact emerging markets like India. So far this year, foreign investors have been net sellers of about Rs 61,000 crore, while during the first two months of 2021 the FIIs were net buyers at about Rs 51,000 crore.

The Russia-Ukraine tension could be a short-lived event, and history shows that it impact on the broader market is temporary. That said, if the tension and its related effects were to continue for a few more weeks, it could adversely impact the listing.

All these factors could dampen the LIC IPO — but, beating all expectations and market reservations, in a few weeks’ time the Indian stock market could even see its biggest ever listing as well. We’ll have to wait and watch.

Vinay K Srivastava is an author and teaches finance at ITS Ghaziabad. Twitter: @meetdrvinay.

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