From valuation to quotas to timing, all that’s wrong with the LIC IPO

LIC may be a Goliath, but participants in its IPO would certainly assess its valuation; if they didn’t, they would be speculators, not investors

Policyholders are just customers of LIC. Their quota in the IPO is similar to a bank offering one to its account holders, or Zomato doing so to its app users. Pic: iStock

The Life Insurance Corporation of India may be celebrating its IPO, as it was oversubscribed by nearly three times. But retail investors who subscribed to the issue have little to cheer as, at the end of the first day of listing, the share closed at ₹875.45 (on the BSE), at a discount of 7.75 per cent from its issue price.

LIC had fixed its IPO price at ₹949 per share. For policyholders the price was ₹889 and for retail investors, ₹904.

This is somewhat similar to ‘operation successful’, where the procedure is done, the surgeon collects his fee, but the patient is dead.

Also read: Market isn’t God; LIC’s listing does not reveal its true value

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From Day 1, LIC Chairman MR Kumar had been trying to create a hype by claiming that the issue was with a discount to its true valuation. He quoted the embedded value of LIC, and spoke about how its issue price was less than that of other life insurance companies the world over.

Prior to the opening of the issue, when asked for his take on the concerns over LIC’s valuation, he replied that none should worry about valuation; LIC is so large that it’s not fair to compare it with its peers, he emphasised.

This was the fundamental flaw in their thinking. LIC may be large. But it does not mean that whoever wants to participate in the IPO will not assess its valuation. If someone invests without any perception about the value for which he or she is paying, then that will not be an investment but mere speculation or gambling.

Moreover, the embedded value is calculated by adding the present value of future profits of a firm to the net asset value (NAV) of its capital and surplus. This means this is based on the firm’s future inflow, unlike the PE (price-earnings) ratio, which is based on the past and present.

Comparison should be based on PE ratio

The issue price of LIC is far higher than the other listed life insurance companies in India in terms of PE ratio. Kumar said LIC’s PE ratio cannot be compared with that of private life insurers.

Also read: Why LIC IPO may not be as attractive as it’s made out to be

Further, he said, investors must look at PE multiples of similarly placed insurance companies elsewhere, maybe in China. When LIC shares are going to be issued only in India and listed only on domestic bourses, it is beyond comprehension how it will be valued based on peers in other markets. As the investors can sell their shares (post listing) only through Indian markets, it is simply irrelevant to know how insurance stocks are valued elsewhere.

The valuation is not decided by the company or its CEO. It is decided by the investors and the place where it trades. Market forces decide the price of a share, which in turn decides the market capitalisation and worth of the company.

All the fundamental factors will be taken into account by the market forces including the valuation of peer group companies in the same line of business. Hence, stating that the market capitalisation of other private life insurers is not relevant for LIC’s valuation is basically a flawed one.

The table below shows how different life insurance companies’ IPOs were priced:

Insurance company PE ratio at the time of  IPO Price to book value at the time of IPO
SBI Life Insurance 55 11.9
HDFC Life Insurance 65 15
ICICI Prudential Life Insurance 29 9
LIC 202 94

 

When the LIC CEO said there is no such thing as ‘timing the market”, and that “time in the market is more important than timing the market”, it is beyond comprehension. For any IPO, there is no “timing the market” by the investors. This quote of Peter Lynch is applicable for secondary markets, not IPO. 

Strange quota for policyholders

It is normal in any public issue to allocate a percentage of shares to employees.  SEBI has permitted a maximum 10 per cent discount in share price to them as well as retail investors.

Also read: Grossly undervalued, LIC’s IPO is the most controversial ever

However, LIC’s issue contained a provision to earmark a percentage to policyholders. Policyholders are just customers of LIC. Their quota is similar to a bank offering one to its account holders, or Zomato doing so to its app users. Strangely, SEBI permitted this.

Which way will the wind blow?

How’s LIC likely to fare, going forward? To answer this, we can make some comparisons.

Of the 21 Indian state-run companies that debuted on the stock market since 2010, half are still trading below their issue price. GIC and New India Assurance, the two state-run insurers that were listed in 2017, have been the worst performers, trading about 75 per cent below their IPO prices.

Public sector banks’ shares are quoted for nearly 30 years in the market. When we compare the market price of these shares, in terms of PE ratio, private banks’ shares are trading higher. When we compare the book value of the banks, again, the valuation of private banks is better (see table below). Similar may be the share price of LIC in the years to come. 

  PE ratio Price to book value
Private banks    
ICICI Bank 18.07 3.05
HDFC Bank 18.84 2.89
Kotak Mahindra Bank 29.22 3.67
Public sector banks    
State Bank of India 12.12 1.52
Bank of Baroda 9.54 0.60
Indian Bank 4.38 0.45

(All details as on May 13, 2022)

We can also make a comparison of LIC with other life insurers as on the date of listing of LIC shares (see table below).

Company PE ratio Price to book value
SBI Life Insurance 71.12 7.32
HDFC Life Insurance 88.35 9.30
ICICI Prudential Life Insurance 94.75 5.95
LIC of India 186 87

(All details as on May 17, 2022)

Hence, on a comparative basis, LIC is still overpriced.

We must note that the listing was done on a day when the overall market was recovering well and the Sensex added 1,344 points (2.63 per cent). Hence, the poor performance of the LIC scrip cannot be attributed to a choppy market.

How other mega issues performed

LIC’s was a mega issue. It should have been worthwhile for investors to analyse how the previous mega issues performed in the market. If the prices of these companies just before the LIC issue are considered, the results are not encouraging (see table below). One can also see how the insurance companies divested by the government performed poorly in the stock exchange post-IPO.

Company Issue size (Rs crore) Offer price

(Rs)

Current price (Rs) Gain/loss percentage
One 97 18,300 2,150 581.45 -73
Coal India 15,199 245 183.10 -25
Reliance Power 11,700 450 14.27 -97
GIC 11,176 912 130.70 -86
SBI Cards 10,341 755 829.75 10
New India Assurance 9,467 800 118.10 -85
Zomato 9,375 76 71.70 -6

(All details as on April 29, 2022)

Caveat emptor

The principle of caveat emptor (buyers beware) is applicable not only while buying tangible things. It should be equally applicable while investing also. If the investors throw caution to the wind, then who can help them?

Now, the value of their investment has gone down. They must make informed decisions — to hold on to the investment or not — based on their risk bearing capacity and their future expectation of the performance of the company. Yes, investors should not forget — ‘Soch Kar, Samaj Kar, Invest Kar’.

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