Moneycontrol Pro Panorama | LIC IPO takes shape, buzz on valuation grows

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

It’s finally here. The Life Insurance Corporation of India (LIC) has filed its share sale prospectus. It plans to sell 316.25 million shares, about 5 percent of its total equity base of 6.32 billion shares.

The question on everybody’s lips: what will be the size of the IPO and its price?

Private sector listed rivals such as HDFC Life Insurance are currently valued between 3-4 times their embedded value (EV). This is the sum of the present value of all future profits and net worth. For LIC, this EV is Rs 5.4 lakh crore.

At twice the embedded value, LIC’s market capitalisation would be Rs 10.7 lakh crore and the size of the IPO Rs 53,500 crore. At 3.5 times, the respective numbers would be Rs 18.7 lakh crore and Rs 93,625 crore. So, no doubts here. It will be India’s largest share sale dwarfing the Rs 18,300 crore raised by Patym’s owner, One 97 Communications Ltd.

However, big is not always better or beautiful. LIC will suffer from the same handicaps as other state-owned enterprises such as government meddling, outdated systems and processes, and slow technology adoption. Besides, there are certain specific factors (hint: VNB margins, commission ratios and product mix) as well. To know more, read our research note on why LIC will be valued at a discount to these private sector players.

Even this valuation has come about because tweaking its profit distribution policy will favour shareholders. This had the effect of blowing up its EV, and hence its valuation, by more than five times in six months, a feat that start-ups would be proud to emulate.

Policyholders may feel aggrieved at this change which leaves them with a much lower share of LIC’s profits. For now, they will have to satisfy themselves with a discount on the IPO price should they wish to bid. The insurer has also reserved 10 percent of the offer size for policyholders.

At the lower end of the range too, we are looking at an IPO that aims to raise Rs 54,000 crore from the market. Do investors have this much appetite and what will be the impact on the secondary markets?

My colleague Neha Dave pointed out earlier this month that in 2021, 27 IPOs saw total subscriptions (including oversubscription) of at least Rs 50,000 crore.

But much will depend on how much liquidity will be withdrawn from the market when this blue whale of an issue drops into the pool. Fund managers would find it hard to exclude a company which will be among India’s three largest listed firms from their portfolios. Even if the issue is a couple of times oversubscribed, we are talking of Rs 150,000 crore leaving the market, albeit temporarily. That could cause a few tremors, especially at a time when foreign investors are unenthusiastic about emerging markets, with the US Federal Reserve set to hike rates. The fall in the markets today, with the Nifty down by 3.04 percent at 3.07 pm, is a reminder of weakening market sentiment.

We will get more clarity closer to the time of the issue which could hit the markets in about three weeks, going by the hints dropped by the disinvestment secretary. Here’s a handy guide to navigate the DRHP, another that explains how to value an insurance company and a summary of the IPO’s key risk factors.

Do follow the coverage of this behemoth IPO at Moneycontrol.

Investing insights from our research team

Tata Power: A play on green infrastructure

Cummins India: Riding on recovery in the domestic economy

Hero MotoCorp Q3 FY22: Numbers weak, but valuation reasonable

Divi’s Labs: Investment to improve yields provides the edge

Gulf Oil: A flat quarter; EV penetration not a threat for now

Concor – Stable growth outlook

Sapphire Foods India: Performance improvement to continue to drive re-rating

Vedanta: Should investors buy this conglomerate, post de-merger cancellation?

What else are we reading?

FMCG stocks are stuck between inflation and a hard place
The Eastern Window | India exploring new diplomacy route to tackle China

Rail Budget high on investment, low on realism

RBI’s love for bonds is a Wordle the market can’t crack

Renewables the next big opportunity for capital goods, but not without challenges

Will this truly, finally be ‘the year of the stockpicker’? (republished from the FT)

Assembly Elections Phase II | Can BJP fight anti-incumbency, retain Uttarakhand?

Technical Picks: Tata Chemicals, HCC, Coal India and IOC (These are published every trading day before markets open and can be read on the app)

Ravi Krishnan
Moneycontrol Pro