What we now know about the Life Insurance Corporation IPO
After a long haul, there is total clarity on what the LIC IPO will be like. The Indian government plans to sell 221.4 million shares, representing 3.5% stake in LIC in the price band of Rs.902 to Rs.949 per share.
While the anchor portion will open on 02nd May, the IPO will open on 04th May and close for subscription on 09th May. While 10% of the total shares are reserved for policyholders, over 15 lakhs shares are reserved for employees.
Both the retail investors and the policyholders of LIC will be able to buy the shares in the IPO at a discount with the discount for the retail investors fixed at Rs.45 over the discovered price.
So, if the discovered price is Rs.949 at the upper band, then retail investors will get the shares allocated to them at Rs.904 per share. LIC will be relying heavily on its 26 crore policyholders and its network of over 14 lakh agents to hard sell the IPO.
The talks are at an advanced stage to find worthy anchor investors who can inspire and give confidence to the other investors. Norwegian Pension Fund and GIC of Singapore are likely to come in as anchor investors for the LIC IPO.
In addition, LIC is also in talks with the Abu Dhabi Investment Authority (sovereign fund of UAE) to become an anchor investor. As per early estimates, the QIB interest in LIC is healthy at the substantially reduced valuations.
Apart from the sovereign funds stated above, the world’s largest fund manager BlackRock Inc with over $10 trillion AUM and the formidable long-only investor, Fidelity Funds are also likely anchor investors in the LIC IPO.
At one point, the LIC IPO was called the Aramco moment for the Indian stock markets, but the size would be much smaller. The LIC IPO would be worth $2.8 billion compared to $29.5 billion for the Aramco IPO in 2019.
The LIC IPO would be the largest IPO even at the reduced valuations and reduced size. At Rs.21,008 crore, it will be 14.8% larger than the recent Paytm IPO and about 40% bigger than the biggest divestment till date of Rs.15,000 crore in Coal India.
What is interesting is that the stock of LIC is already quoting at a grey market premium (GMP) of Rs.20 per share. This unofficial premium was around Rs.48 a few days back.
At the LIC IPO GMP of Rs.20, it means grey market is expecting LIC to list at around Rs.969, or a premium of 2.1% on the issue price.
That would mean that the funding banks may not be too keen to fund the IPO as it will not really cover the cost and the IPO would largely be restricted to the buy and hold types. However, in the last few days, the value proposition for LIC has built in a fairly favourable manner.
The IPO of LIC values the overall business at Rs.6 trillion against the embedded value of Rs.5.4 trillion. That gives a market cap to embedded value ratio of 1.11 times. That makes LIC cheaper than most of the private insurers that are quoting at a market cap to embedded value ratio of above 3.
Even if you look at the global valuation sweepstakes, the LIC valuation is cheaper than the global peers, except the Chinese life insurance names.
The GMP could still change ahead of the IPO opening but a lot would depend on the anchor day placement. Out of the QIB quota, the government wants to ensure that 50-60% of the QIB quota is lapped up by the anchors, so that there is a lot more certainty going into the IPO.
For the long term investors, LIC offers a 69% share of the life insurance premium market and an ROE of over 82%. That is surely compelling.