LIC¡¯s IPO Pricing Might Value It Lower Than Reliance & TCS

With an expected rollout in this quarter of January-March 2022, the hype around the much-anticipated IPO of India¡¯s largest insurer LIC is growing day by day.

And as per the recent news buzzing around this huge IPO, the government is likely to value LIC at a relatively conservative price, vis-a-vis what some analysts had earlier estimated, which included the expectation of India's largest life insurance company being forecasted as the most valuable company in India.

Although the valuation is still expected to be in several lakh crores of rupees, it will likely be in single digits, which, hence, places LIC¡¯s valuation below other Indian giant companies like Reliance Industries (valuation of around ? 16.45 lakh crore) and TCS ( valuation of around ? 14.3 lakh crore).

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Still Expected To Be India¡¯s Largest IPO Yet

Even at the expected conservative valuation, the IPO of LIC would still likely be the country's largest to date.

And to encourage its existing policyholders to participate in the IPO, LIC is expected to issue shares at a discount to its customers. LIC is reportedly keen on policyholder participation, as in future, there would be a shift in the distribution of surplus.

Currently, LIC distributes only 5% of its surplus to shareholders, as against the 10% that it is allowed to, and the rest is being distributed to the policyholders.

The basis of LIC¡¯s pricing is expected to be the report submitted by Actuarial firm Milliman, which includes the embedded value of LIC.

But as per insurance industry sources, comparing LIC's assets under management (AUM) with those of private players can give it a disproportionate valuation, because a big chunk of LIC¡¯s funds represents low margin businesses like guaranteed return plans, group insurance funds and superannuation funds of employers.

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LIC¡¯s Current Market Cap & AUM

At present, State Bank of India-owned SBI Life Insurance has a market capitalization of ?1.2 lakh crore, against AUM of ? 2.4 lakh crore. LIC, on the other hand, reportedly has an AUM that is almost 15 times higher than this. That is what has prompted assigning a value of over ? 15 lakh crore, which is turning out to be too optimistic, as per actuaries.

LIC is likely to make the embedded value report a part of the draft red herring prospectus (DRHP), which it is expected to file after incorporating the first-half results.

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The Aim Behind IPO

Through its stake sale in LIC, the government is aiming to fulfil its disinvestment target of Rs 1.75-lakh crore in the current fiscal year of 2021-22. The government plans to divest 5%-10% equity in LIC, which is likely to fetch them around ? 80,000 crores to ?1 lakh crore through the share sale.

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