LIC IPO is Around the Corner. Here's what we Know...

What's the first thing that comes to your mind when you think about Life Corporation of India (LIC)?

I'm sure it must be the popular punch line 'Zindagi ke Saath bhi, Zindagi ke Baad bhi'.

India's largest life insurer, LIC, whose catchy tagline we have all grown up listening to, is gearing up to hit the market with its initial public offering (IPO) very soon.

After the Union Budget 2022, the euphoria around the LIC IPO has become crazier and wilder.

The Indian government aims to list LIC by March 2022. The funds raised will be crucial to meet its revised disinvestment target of Rs 780 bn.

In this article, we discuss the most recent events in the LIC IPO process, as well as some key points to note before the public offer arrives.

Indian government to file the IPO papers next week

The government will file the draft red herring prospectus (DRHP) for the IPO of LIC with the market regulator by the end of next week.

The government will dilute at least 5% stake in the company, according to a report.

In an interview, Tuhin Kanta Pandey, the top government official in charge of asset sales, said the draft prospectus for LIC is in the final stages and is awaiting approval from the regulator.

The prospectus is expected to be submitted to the capital markets regulator in 7-10 days and will indicate the approximate size of the sale.

The remarks come after the government drastically decreased asset-sale expectations in the budget. This raised concerns about how much money it hopes to raise through the LIC IPO.

In the revised estimate for the financial year 2022, the government scaled down the disinvestment receipt for the current financial year to Rs 780 bn, about 56% lower than the initial estimate of Rs 1.75 tn.

What about the valuation?

The embedded value (EV) of LIC has been finalised at more than Rs 5 tn (US$66.8 bn), according to a government official.

Investors are anxiously waiting for the government to indicate LIC's embedded value when it releases the prospectus. This critical financial indicator is a measure of future cash flows in a life insurance businesses.

There has been speculation about this number in Indian media - from as low as US$53 bn to as high as US$150 bn.

The embedded value will help establish the market valuation of LIC and determine how much money the government raises in the flotation.

During an interview, Pandey said the embedded value could be more than Rs 5 tn and the enterprise value will be multiples of that.

According to an international media report, LIC the is third strongest insurance brand globally with a valuation of US$8.65 bn.

LIC ties up with Policybazaar to expand online footprint

Yesterday, LIC and Policybazaar.com joined hands to offer a wide range of term and investment products to consumers.

The alliance aims at facilitating digital distribution of life insurance products across the nation.

Policybazaar's digital distribution platforms would assist in increasing insurance awareness and penetration throughout India.

This is the first time the LIC has collaborated with a private insurance aggregator to broaden its reach. So far, the insurance industry behemoth has depended on its extensive network of nearly 1.3 million agents to expand its customer base.

Will the IPO go public in March 2022?

The LIC IPO is very crucial for the government.

Tuhin Pandey said the government aims to come out with the IPO and subsequently list LIC on the bourses by March 2022.

To achieve this year's disinvestment target of Rs 780 bn, the selling of the shares by the end of March becomes very important for the government.

A delay will complicate the government's budget calculations.

FDI policy fiasco resolved?

On Thursday, the Department for Promotion of Industry and Internal Trade (DPIIT) said it is making changes in the foreign direct investment (FDI) policy to facilitate disinvestment of LIC, after taking views from the finance ministry.

'Interministerial consultations are in the last phases. Things should happen very soon,' DPIIT secretary Anurag Jain said. He hinted that the Cabinet would be approached for approval soon.

As per the current FDI policy, 74% foreign investment is permitted under the automatic route in the insurance sector. However, these rules do not apply to the LIC, which is administered through a separate LIC Act.

Under the LIC Act of 1956, no foreign investments are allowed to invest in the company.

The DPIIT is consistently trying to alter the FDI policy in order to enable foreign participation in the LIC IPO.

The clearance for FDI in LIC will not just allow global funds to participate in the IPO but will also open doors for a significant stake purchase after the listing.

Government's stake in the insurance company

Currently, the government owns 100% stake in LIC.

Once listed, LIC is likely to become one of the biggest domestic companies by market capitalisation with an estimated valuation of more than Rs 5 tn.

As per the amendment, the central government will hold at least 75% in LIC for the first five years post the IPO, and subsequently hold at least 51% at all times after five years of the listing.

Moreover, to engage smaller retail investors, the government has even planned to offer as much as 10% of LIC's IPO shares to policy holders spread across the country.

LIC IPO sparks a rush for new demat accounts

Last month, LIC had released advertisements inviting its policyholders to become shareholders. It will reserve at least 10% of the investments in its IPO for them. There's also the possibility of a discount on IPO price. This pushed several policyholders to open their demat accounts.

Many brokerages in India anticipate that the IPO would help them gain new customers since many first-time capital market investors may create demat accounts specifically to invest in the IPO.

They expect 10-30 lakh new demat accounts to be opened ahead of LIC IPO.

Moreover, there has been news of brokers even offering to pay money to LIC shareholders to open new demat accounts and rent it to them for the IPO application. Brokers are even willing to bear the entire cost of IPO application.

India's largest IPO till date has been Paytm, which was of the size of about Rs 183 bn and was launched in November 2021. Coal India's IPO was the second largest in India, valued at Rs 154.8 bn.

LIC is set to smash all records and become the biggest IPO in Indian history.

A quick look at the company's financials

LIC declared a profit after tax of Rs 14.4 bn for the first half of fiscal year 2021-22, compared to Rs 61.4 m the previous year.

According to LIC, its new business premium growth rate was 554.1% in the first half of the financial year 2022, compared to 394.8% in the previous fiscal year's similar period.

Its total net premiums climbed by Rs 16.8 bn to Rs 1.86 tn between April and September 2021, up from Rs 1.84 tn the previous year.

In the April-September 2021 period, the state-owned insurer recorded an increase in overall premiums of Rs 174 bn, while investment income increased to Rs 3.4 tn.

Who will manage this IPO?

The public offer is so massive that the government had to appoint 10 merchant bankers to handle the due diligence process of the LIC IPO.

These 10 include Goldman Sachs (India) Securities, Citigroup Global Markets India, Nomura Financial Advisory and Securities India.

Other bankers include SBI Capital Markets, JM Financial, Axis Capital, BofA Securities, J P Morgan India, ICICI Securities, and Kotak Mahindra Capital.

Few interesting facts about LIC

LIC is a household name and it has the largest network of offices in India.

It has eight zonal offices, 113 divisional offices, 74 customer zones, 2,048 branch offices, and 1,546 satellite offices. Moreover, the insurer has 42,000 points at which policyholders can deposit premiums. It has roughly 13.5 lakh agents that sell its policies.

The insurance company has 61.4% market share of new business premiums in the life insurance space as of 31 December 2021, according to the data from insurance regulator IRDAI.

This is 1.59 times the market share of the entire private sector life insurers. Compared to the second-largest insurer SBI Life, LIC's market share is 6.7 times.

LIC is the largest asset manager in India with Rs 36.7 tn Assets Under Management (AUM). LIC's AUM on a standalone basis were equal to 18% of India's gross domestic products (GDP) for the financial year 2021.

Final thoughts

We don't know whether LIC's public issue will be successful or not.

However, the enthusiasm for the LIC IPO is strong due to lot of initiatives taken by government. For instance, the preferential allotment for its policyholders, change in FDI policy, advertisements in newspapers, and sending personal text messages to people.

This has ensured the maximum people know about the IPO. It will bring in a new pool of investors to the capital markets.

Moreover, given the current state of the banking industry, such a step was required to help revive the banking, financial services, and insurance sector (BFSI) sector.

The inclusion of such a large well-known firm would help the BFSI industry attract more investors.

Also, LIC will help the government to narrow its fiscal deficit amid rising expenditure and a slump in revenues because of the pandemic.

It still has a few weeks to go, but this mammoth IPO is something to look forward to.

Here's what Co-head of Research at Equitymaster and Editor of Forever Stocks, Tanushree Banerjee wrote about LIC's IPO in one of her editorials.

• The reason I am writing about this is because I see several crorepati IPOs in India over the next few years...starting 2021.
  
  Everyone has heard and read about the upcoming LIC IPO.
  
  The insurer still has over 70% share of all life insurance policies sold in the country.
  
  And its assets under management stood at Rs 37 trillion in 2021. These facts alone make the IPO very enticing apart from its potential size.
  
  Add to that the government's plan to privatise some PSUs to raise funds for infrastructure spends.
  
  The success of PSU IPOs like IRCTC makes this disinvestment plan a hook for IPO gains.

You can check out the entire piece here where Tanushree has shared a 4-Point checklist to invest in IPOs.

Meanwhile, you can also watch her recent video on how to evaluate the LIC IPO.

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And to know more, check out the current and upcoming IPOs.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...