Life Insurance Corporation of India (LIC) IPO – one of the most awaited IPO of the year 2022 will open on 04 May 2022. The LIC IPO price is ranged between Rs 902-949 which will help to raise aggregating up to ₹21,008.48 Cr to stakeholders.
LIP IPO Details
Retail and employee bidders will get Rs 45 per share, while if you are a policyholder you can get Rs 60 per share discount if get allotted the share while applying from this primary market.
Though, many analysts recommend subscribing thanks to its cheaper valuation compared to listed insurers like SBI Life, HDFC Life and ICICI Prudential Life. But on the other, some analysts are also cautioning investors against the pitfalls of investing in the country’s largest life insurer.
Hence, the point is whether you should invest in this mega IPO or not. We brought here few crucial points before you invest in this IPO, let’s find out that.
#1 Losing the Market Share in the last 5 yrs
LIC has been consistently losing market share to private peers. Currently, LIC holds 64% market share in terms of total life insurance premium. It grew at a compounded annual growth rate (CAGR) of 9% during FY16-21, while private insurers grew at 18%.
#2 Huge Stake in Loss Making Companies
LIC has admitted that at times its actions at the behest of the government could be contrary to shareholders’ interests. Previously, LIC has bailed out the initial public offerings (IPOs) of Public Sector Units (PSUs) like Bharat Dynamics Ltd and Hindustan Aeronautics Ltd in 2018.
The firm also bought IDBI Bank, which was reporting losses continuously due to a surge in bad loans. LIC had infused Rs 21,600 crore for 51% stake in IDBI Bank. In 2019, another Rs 4,743 crore was infused into the bank.
#3 Lack of Digital Presence Costing Company
Another concerning factor is that LIC doesn’t have a strong digital presence and 90% of its policies are sold by agents. The company’s draft papers showed that just 36% of individual renewal premiums were collected digitally, compared to over 90% for private players. Analysts said that if this trend continues, then the total cost is likely to increase for LIC, going forward.
Investing in digital collection systems is a one-time cost, whereas physically investing in branches and resources to collect actual cash will be more expensive. Analysts are worried that persistently weak digital presence could keep costs high as agents typically receive high commissions.
#4 Low Valuation of New Business Margin
Yet another worry is that LIC’s low value of new business margin (VNB) as of September 2021 stood at 9.3%, whereas for the full FY21, it was 9.9%. However, other listed players like SBI Life, HDFC Life, ICICI Prudential Life, Max Life and Bajaj Allianz Life reported VNB margins of 11-27%.
The VNB margin for all the players improved substantially from 2016 to 2021. Among the players in this set, HDFC Life reported the highest VNB margin of 26.1% in FY21, followed by Max Life with 25.2%.
#5 Incurring the Mark-To-Market Loss
LIC is also sitting on a mark-to-market (MTM) loss of Rs 6,028 crore. LIC said in its draft papers that of the Rs 11,265 crore worth of debt papers of mispriced insurance policies, papers worth Rs 5,351 crore are non-performing assets (NPAs) for which full provisioning has been done at an amortised cost, and if this transaction is shown in the balance sheet, LIC would have to show a loss of Rs 6,028 crore. Analysts are now watching how LIC will adjust this MTM loss in its balance sheet.
Aditya Kondawar, Chief Investment Officer at JST Investments said that despite the valuation being 1.1x price-to-embedded value, he would wait and watch this IPO. LIC’s peers HDFC Life and SBI Life are trading at P/EV of 4.0x and 3.0x respectively, which makes it attractive to investors.