Is it worth investing in LIC (Life Insurance Corporation of India) IPO?

Life Insurance Corporation of India incorporated on September 1, 1956, under the LIC Act by merging and nationalizing 245 private life insurance companies in India, is the largest life insurer in India, with a 61.6% market share in terms of premiums, 61.4% market share in terms of New Business Premium, 71.8% market share in terms of the number of individual policies issued, an 88.8% market share in terms of the number of group policies issued for Fiscal 2021. LIC is the largest asset manager in India as of December 31, 2021, with an AUM of Rs. 40.1 trillion, on a standalone basis which is 1.1 times the entire Indian mutual fund industry’s AUM. It is also ranked 5th globally by life insurance GWP and 10th globally in terms of total assets as of March 31, 2021.

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The primary distribution channel for an individual business is the agency, which accounted for 96.2% of NBP for individual products as of Dec 2021 and LIC’s agent workforce accounted for 55% of the total industry agent count and they have very high productivity (NBP of Rs. 412,934) when compared to agents of other insurance companies (NBP of Rs. 124,892).

Promoters & Shareholding:

The President of India, acting through the Ministry of Finance, Government of India is the company promoter.

Public Issue Details:

Offer for sale: OFS of approx. 221,374,920 equity shares of Rs. 10 aggregating up to Rs. 21,008.48 Cr. (As per SEBI listing guidelines, the government will have to mandatorily dilute its LIC stake to allow public shareholding of 10% within 2 years and 25% within 5 years, ensuring constant supply if demand persists)

Total IPO Size: Rs. 21,008.48 Cr.

Price band: Rs. 902 – Rs. 949.

Objective: To carry out an offer for sale of about 3.5% of the shares and to get the benefits of listing on the stock exchange.

Bid qty: minimum of 14 shares (1 lot) for Rs. 14,235 and maximum of 14 lots.

Offer period: 4th May 2022 – 9th May 2022.

Date of listing: 17th May 2022.

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Pros:

  • The largest life insurer in India.
  • LIC is also the largest institutional investor in Indian markets.
  • Trusted brand and a customer-centric business model, the brand ‘LIC’ was recognized as the 3rd strongest and 10th most valuable global insurance brand in 2021.
  • Reliable risk management framework.
  • Diverse product portfolio.
  • Omni-channel distribution network with an unparalleled agency force.
  • Professional and experienced management team.

Cons:

  • Even though LIC is the largest life insurer with a market share of ~43%, it has been losing market share to private players, and its weighted received premium growth has slowed and been lower than private peers’ in recent years.
  • LIC depends heavily on the agency channel (93.8%).
  • Individual NBP has declined 10% YoY.
  • Lower attractiveness of recalibrated par products since PAR dominated LIC’s product mix with a ~65% share in FY21.
  • Higher surrenders and lower persistencies.
  • LIC’s total cost ratios stood at 33% in 1HFY22 which is higher than the top 5 private sector peers which have a median of 19% total cost ratio.

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Subscribe or avoid?

Sectorial outlook – India is the Fifth Largest Insurance Market in Asia and Has Exhibited Consistent Growth in Insurance Premiums. The size of the Indian life insurance industry was Rs. 6.2 trillion based on total premium in Fiscal 2021, up from Rs. 5.7 trillion in Fiscal 2020. The industry’s total premium has grown at 11% CAGR in the last five years ending in Fiscal 2021. New business premiums (NBP) grew at 15% CAGR during Fiscals 2016 to 2021, to approximately Rs. 2.78 trillion. In fact, in Fiscal 2021 – a year impacted by the COVID- 19 pandemic, the NBP of the industry rose by 7.5% even with this high growth in the insurance sectors, the Indian market is still largely underinsured compared to major economies and due to the higher share of savings than protection in life insurance premiums, the actual protection provided by insurance in India would be much lower compared with even other developing markets so the potential for this sector still remains high for the foreseeable future and we expect the profitability of life insurance companies, in general, to further improve.

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The financials (revenue and net profit) are shown in the graph below:

Valuation – For the last 3 years average EPS is Rs. 4.47 and the P/E is around 212x on the upper price band of Rs. 949. The EPS for FY21 is Rs. 4.70 and the P/E is around 201x and if we annualize FY22 earnings then the asking price is at a P/E of 350x. SBI Life (P/E 71), HDFC Life (P/E 101), and ICICI Prudential (P/E 99) are its listed peers as per the RHP. The company’s P/E is between 201x and 350x however it is not truly comparable on an apple to apple basis with its peers in P/E and looking at the embedded value LIC’s 1.1 is lucrative pricing when compared to its peers hence considering all the factors the listing seems to be fully priced.

Discounted price: There is a discount of Rs. 60 for LIC policyholders. and Rs. 45 for Retail and employees.

Recommendation – LIC is the largest Insurer and largest asset manager in India and its listing will broaden the investible universe and further prove to be structurally positive for the sector in the long run as given its reach and size raise the sector’s relevance in investor’s portfolio but since LIC is mainly savings dominated (product mix) and agency-driven, increasing demand for protection products will cause it to lose market share further even though some granular steps in a different direction might start to maintain its relevance and improve profitability and due to a low presence in ULIPs, which formed about 20% of the insurance industry’s new business in terms of WRP in FY21 will not attract investors looking for returns.

So there are a lot of questions regarding its business and its profitability in the future compared to Private insurers have a more balanced product mix which is becoming more popular, after considering all the above factors the listing though seems reasonably priced we would recommend investors to “Avoid” from a long term perspective, not to undermine the fact that investors with a short term outlook may make some listing gains.

Disclaimer:

This article should not be construed as investment advise, please consult your Investment Adviser before making any sound investment decision. If you do not have one visit mymoneysage.in

Also read : All about investing in Sovereign Green Bonds

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