LIC: The Big Bang IPO

The LIC IPO is probably the biggest event in the stock market which overshadows probably even the dream run of the Sensex which topped the 60,000 mark this year. One is the size of the issue, which is really big. The other is that LIC disinvestment project has been pending for long and had to be postponed due to the pandemic.

It is also a strong signal to the market that the government means business and can be seen as a follow up on what was announced during the Atmanirbhar series of reforms. It hence has sent feelers about other such disinvestment/privatisation plans.

The LIC is the largest life insurer and would probably continue to be the leader for several more decades, thanks to the inherent trust of people in the institution. It is not surprising that the embedded value of the enterprise has been put at ₹5.4 lakh crore.

Valuation arithmetic

Intuitively with a multiple of 3-4 times which is what is commanded by the other large insurance companies, the valuation could be in the range of ₹16-20 lakh crore. The final offering will be of interest and assuming that the government is disinvesting 5 per cent of the enterprise at a valuation of ₹65,000 crore (which is out of the ₹78,000 crore of revised disinvestment receipts in the Budget), the valuation could be at a very conservative ₹13 lakh crore.

This is allowing for the fact that the government would like to give upfront the investors a potential gain in the market beyond the multiple of 2.4-2.5 which is implicit here. This is what the rudimentary arithmetic of the IPO could look like.

The strengths of the company lie in having the first mover advantage. First being owned by the government is a big positive as it signals confidence.

Second, it has been run rather professionally which adds to the value of the enterprise. It has also been earning profits historically. Third, as a large part of its investments are in government paper, the portfolio is protected and there is a steady stream of revenue in future. Fourth, the company has large investments in equities of blue chip companies and give a high yield given that the purchases were reckoned in the past.

Therefore, there is every reason for retail investors to consider this IPO as part of their portfolio. As the pricing is expected to be reasonable and well spread out to policy holders there appears to be something for everyone.

Once done, this would be a landmark not just for the government but also the company. From the point of view of the government the next steps also need to be considered. Should the government keep divesting slices of the company till it reaches 51 per cent?

This is a logical question because from the point of view of both market and the government’s ideological stance. Selling LIC from an ideological point was to extract value from the enterprise in which case it cannot stop at 5 per cent and logically should move upwards towards 49 per cent after which the more challenging decision of letting go can be considered — maybe after a decade or so.

Investor interest

From the market perspective, if divestment stops at 5 per cent, interest in trading will come down. Therefore there could be a compulsion to keep divesting in parts to keep the stock attractive. It should be pointed out here that LIC as a company can be counted on giving steady returns over time with little volatility in earnings. This is the nature of the business and holds for all the leading insurance companies.

Unlike general insurance where a catastrophe like a flood can increase claims substantially, the same does not hold for life and the Covid pandemic clearly vindicates this view. Unlike a new age company, the life insurance business has very little volatility. Volatility normally creates investment opportunities and hence an insurance stock cannot generate this sentiment. Therefore it may be necessary to keep adding to the free float to keep interest alive.

Internally, the company’s mindset will change once it is listed. Currently being a government company, it was outside the radar of analysts, who have the power to nudge the entity to reorient its ways.

For the government the issue to be kept in mind is the future of disinvestment in general in the context of LIC. LIC has traditionally been the investor of last resort and in future such support will be scrutinised by the analysts as these investments become part of the projections.

In short, LIC will have to disengage gradually from the government’s disinvestment plans especially from deals which do not conform with market standards. This may not be an issue going by the government’s firm stance on privatisation or disinvestment for that matter. The way in which Air India was sold shows that certain bold decisions would continue to be taken if required.

Also the insurer will have to get into a “quarter-to-quarter” performance mindset, which is a feature of listed companies. The company will also be constantly compared with its peers, which is inescapable. Hence the market will be overly sensitive to every aspect of the business numbers and financials with the success of every scheme being evaluated with the benchmarks.

The same would hold for all the cost and productivity ratios and hence LIC would be under the radar forever. While this task is not unsurmountable, there would have to be necessarily a change in mindset until such time it becomes a part of the DNA. But LIC, given its stature, will adapt to the new situation quickly.

The LIC IPO is likely to be a success (assuming that the Russia-Ukraine war eases in the next couple of weeks), and will lay the roadmap for all other disinvestment proposals too in the years to come. Will this be a one-off exercise, or the first in a series remains to be seen.

The writer is Chief Economist, Bank of Baroda and author of: Hits & Misses: The Indian Banking Story. Views are personal

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