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LIC IPO – What you must know ahead of investing in the LIC IPO?

LIC IPO - tradeplus blog

The Life Insurance Corporation of India (LIC) was founded in 1956 under the LIC Act (corporation established by an Act of Parliament) by merging and nationalising 245 small and medium-sized private insurers. What must be said in LIC’s favour is that even 22 years after private competition was allowed in India, it still controls 71% of individual policies and 89% of group policies.

Here are some frightening and ominous statistics about LIC. It has a total AUM of Rs.40.2 trillion, which is 10% more than the entire mutual fund industry in India. Aside from being one of the most trusted brands, LIC is also regarded as secure and prestigious. It provides endowments, term plans, health products, annuities, and ULIPs. It has a network of 13.30 lakh agents, as well as 2,048 branches and 1,559 satellite offices. Above all, as of December 2021, LIC had 27.9 crore active policies.

LIC IPO – Key details of the offer

Here are 3 important things that you must know about the LIC IPO before deciding whether to apply or not.

  1. LIC had annualized premium equivalent (APE) of Rs.45,588 crore for the fiscal year 2020-21, with individual APE accounting for 71%.

  2. The indicative post-listing market capitalization of Rs.600,242 crore discounts the embedded value of LIC (as per Milliman Advisors) at 1.11X.

  3. Apart from the branch and satellite office network, LIC has an extended network of 13.3 lakh agents, 70 bancassurance partners and 215 alternate channel partners.

Capital issue structuring for the LIC IPO

  • The LIC IPO is an offer for sale (OFS) of 22,13,74,920 shares in the price band of Rs.902 to Rs.949. Issue size at the upper price band works out to Rs.21,008.48 crore.

  • The government of India will sell a 3.5% stake in LIC post-issue. the holding of the government will come down from 100% to 96.50%.

  • LIC policyholders will have a 10% reservation of up to 2,21,37,492 shares and they will also be given a special discount of Rs.60 on the discovered price.

  • LIC employees have a reservation of 15,81,249 shares. Employees of LIC, like other retail investors, will get a discount of Rs.45 on the discovered price.

The final allocation by category will be; Qualified Institutional Buyers or QIBs (988.28 lakh shares), HNI/NII (296.48 lakh shares) and retail investors (691.80 lakh shares).

Application options for retail investors in LIC IPO

The investor lot is 15 shares and in multiples of lots of 15 shares thereof. Check the table.

Retail investors can start with 1 lot and go up to 14 lots (210 shares) worth Rs.199,290.

For LIC, the market cap / embedded value ratio works out to 1.11X, which is sharply lower than private sector peers. It is also lower than global life insurers ex-China.

LIC IPO – How should investors approach the investment decision?

While it is advisable to consult with your financial advisor before taking an IPO investment decision, here are some factors to consider ahead of the IPO issue.

  1. LIC continues to be a dominant leader in life insurance by a huge margin, even after 22 years of private sector competition.

  2. The distribution network of 13.3 lakh agents is a sort of business moat for LIC, that is going to be hard for any other insurance player to replicate.

  3. For generations of Indians, the LIC name has been synonymous with trust and it is a brand that has been built largely by word of mouth.

  4. Even if you take a macro picture, Insurance is largely underpenetrated in India compared to Southeast Asia or Europe. That is the real goldmine for insurers.

While the advantages are numerous, there are some questions too. Will the government guarantee on LIC policies continue, and for how much longer? Will the government still influence investment decisions at LIC? How does LIC adapt to increased digitization. For now, the reduced valuation of LIC does look like a compelling proposition for investors.

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