The Life Insurance Corporation of India’s (LIC) mega IPO is set to hit the markets in March. It has generated a lot of interest amongst policyholders for whom the state-owned life insurance giant will be carving out a special quota. And, to make the deal sweeter for policyholders, LIC is also likely to offer a discount on issue price. The details and quantum of discount will be disclosed closer to the IPO.
Irrespective of the discount, however, you need to understand the parameters key to an insurance company’s valuation, LIC’s performance and its future prospects and so on before taking the call to invest. This is particularly true if you are a first-time equity investor.
According to Chennai-based wealth management firm iThought Financial Consulting’s Shyam Sekhar, a 5-10 percent discount to issue price would be a fair offer. In addition, you also need to understand some insurance valuation parameters and ascertain how LIC fares in comparison to its listed private sector peers such as SBI Life Insurance, HDFC Life Insurance and ICICI Prudential Life Insurance. “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 earning per share (EPS) and P/E ratio. The valuation multiple is usually on the embedded value of the business,” he says.
History of LIC’s role as the rescuer-in-chief for the central government is another cause for concern. However, Sekhar feels that the past decisions of the government have already been 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,” he adds.Tune in to Simply Save for details.