If there is one consistent feature of Union Budgets over the last many years, it is in setting extremely high targets for disinvestments of public sector enterprises. These targets are invariably not met during the course of the subsequent year.

Budget 2021 had set a target of ₹100,000 crore for disinvestment of government stake in public sector banks and financial institutions apart from ₹75,000 crore from other disinvestment receipts. Actual disinvestments receipts are way off the target. Yet, Budget 2022 is expected to estimate a high disinvestment target as has been the practice in the past. In contrast to the earlier trends, this year the disinvestment target could be well be met as early as April 2022 -- thanks to one event -- the IPO of LIC that the entire nation appears to be waiting for.

LIC IPO

If all goes well, the draft red herring prospectus (DRHP) of LIC is expected to be filed with SEBI by the end of January which could mean that the IPO could open in March.

The government and LIC have been doing all they can to ensure that they pull off this IPO without a glitch. Insurance companies are valued based on Embedded Value ( EV). Embedded value consists of the addition of net worth and present value of future profits expected with some adjustments.

The EV of SBI Life Insurance Company at the time of their public issue was ₹165,379 million. It has been reported that the government-appointed actuary has pegged the embedded value (EV) of the LIC at ₹4-5 trillion -- more than 25 times the EV of SBILC. The market valuation of insurance companies is normally 3-4 times its EV. On this basis, the government is expecting that the market valuation of LIC would be around 15 trillion. With this sort of valuation, they would be able to meet the disinvestment target with change to spare.

The adjusted net worth of LIC is expected to be high as the policyholders fund would be segregated into participating and non-participating funds. Participating fund is the operating part of insurance companies -- the insurer’s profits and surplus are shared with policyholders and from which all payments to policyholders are made. A non-participating fund has all receipts from non-participating policies -- in which non-bonuses or surplus is shared with policyholders. In addition, LIC has a lot of treasury gains which could only add to its valuation.

Pricing pressure

Almost every Indian investor would be keen to keep some part of LIC in their portfolio. They would be keen to know how much the issue would be priced at so that they can plan to allocate funds for the IPO.

Valuation principles always look to the market for indicators for valuation. In 2017, SBI Life Insurance Company priced their issue at ₹700 -- its market price is now around ₹1,260. Pricing the share of LIC is going to be tricky -- too low a price would tend to devalue the crown jewel of the insurance industry in India and too high a price would put off investors.

On a very broad level, LIC’s profits and EPS are twice that of SBI Life Insurance which would mean that ₹1,400 should be a target price. However, LIC has a much larger population of both policy holders as well as range of policies. On the flip side, LIC has made many investments that may have to be written off (the true value of LIC’s financial investments would be known once they adopt Ind AS accounting standards).

Keeping all these factors in mind, the IPO could possibly come in the range of ₹1,400-2,000. However, since valuation is an exercise of putting assumptions into numbers, a disclaimer is to be made -- the above range could well be off the mark if the assumptions change. It is going to be an interesting two months for investors in India.

The writer is a chartered accountant

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