Mohan Lavi

Too early to value LIC

Mohan R Lavi | Updated on February 26, 2020

Insurance giant is yet to get ready for its IPO

Ever since the Finance Minister’s Budget announcement that the government intends to disinvest some of its stake in the Life Insurance Corporation of India (LIC), everyone interested taken their turn at valuing the Corporation in an attempt to guess the issue price. These attempts are premature, due to the fact that LIC as a corporate entity is not ready for disinvestment yet and the financial information available is insufficient to attempt a valuation.

For instance, the paid-up capital of LIC is only ₹100 crore — any valuation done with this low capital would yield absurd results. Also, currently, LIC pays only 5 per cent of its profits to its shareholder (the government) and the other 95 per cent goes to the policyholders — if such segmental valuation is done, it would be biased in favour of one of the segments. It is obvious that a lot of ground work needs to be done prior to getting LIC ready for an IPO.

An early debate is arising about whether LIC should be disinvested. As is to be expected, trade unions are opposing the move. Employees expect more work with the same wages. It is clear that the disinvestment will happen at some point in time, since the government has budgeted for a significant amount from it; numbers of around ₹90,000 crore are doing the rounds. Apart from providing much-needed cash flows to the government, LIC could also become a bit more prudent as a listed company that owes a responsibility to shareholders.

Over the last decade or so, LIC has acted as an “investor of the last resort” to many a public issue. Many of these investments have to be provided for; this could happen once LIC adopts Ind AS accounting standards from next year. A blockbuster IPO could also breathe some life into the markets that tend to lost steam easily.

But since all valuations involve some degree of estimates, a back-of-the-envelope valuation for LIC can be attempted. The much used — and abused — discounted cash flow technique (DCF) would not work well for an insurance company due to timing differences in cash flow. For example, LIC has built a big business in single-premium policies, for which a cash flow would not apply.

Most insurance companies calculate embedded value (EV) for the purposes of their valuation. The EV is the sum of adjusted net worth and free surplus. The adjusted net worth is the present value of future profits less a deduction for some risks, options and guarantees.

One of the valuation principles prescribed is the market method, in which valuation comparisons are made with the market. SBI Life Insurance Company (SBILIC) had an approximate EV of ₹20,000 crore when it went public. Its issue was priced at ₹700. But SBILIC has a net profit after tax of ₹1500 crore; LIC’s is around ₹27,000 crore. Out of the 23 players in the life insurance industry in India, LIC commands a dominating share. Assuming that LIC is twice the size of SBILIC, its EV should be around ₹40,000 crore.

However, the restructuring LIC as a corporate entity for the purposes of listing, setting its books as per Ind AS and the negative sentiment on selling a jewel of the nation could result in an EV of around ₹30,000 crore.

Going by the market method, the SBILIC issue was priced at ₹700, HAL at ₹1,215, IRCTC at ₹320 and Coal India at ₹245. Though these are early days to hazard a guess, LIC could probably fit into a slot between SBILIC and HAL. This would translate into an expected IPO price of ₹950 per share.

Potential shareholders would be hoping that subsequently after the listing, the LIC share follows the path of IRCTC and not HAL.

The writer is a chartered accountant

Published on February 27, 2020

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