LIC IPO Reduced valuation; Still the biggest IPO ever in India; What investors need to know

Life Insurance Corporation’s valuation is “fair and attractive” and the government expects significant retail investor participation in LIC’s IPO, DIPAM Secretary Tuhin Kanta Pandey said on Wednesday. The long-awaited initial public offering (IPO) is set to open on May 4 and close on May 9.

The government reduced the size of the issue from 5% to 3.5% due to unfavorable market conditions. Moreover, he also reduced the price of the show. Compared to earlier projected valuations of over Rs 10 lakh crore, the business is now valued at Rs 6 lakh crore at the higher end of the price range.

The size of LIC’s IPO is Rs 21,000 crore, valuing the insurer at Rs 6 lakh crore. The state insurer disclosed its intrinsic value (EV) for the first time at around Rs 5.4 lakh crore. Intrinsic value is the sum of the present value of future earnings and the adjusted net asset value. It could be considered similar to book value but adjusted for provisions and future cash flows.

“While LIC’s valuations appear to be cheap relative to publicly traded private players, investors should keep in mind that LIC has a 9.9% lower VBN (value of new business) margin over the course of the year. fiscal 2021 compared to private players who have VNB margins of 22-27% due to a higher share of group ownership and proceeds,” said Yash Gupta, equity research analyst, Angel One.

At the supply band level, the LIC IPO is valued at an embedded value at the price of 1.06-1.1 its September 2021 EV of Rs 5,39,686 crore, representing a significant discount vs. listed private life insurance companies trading at P/EV of 2.5-3.9x their December 2021 EV. While HDFC Life Insurance is trading at a P/EV of 3.9x SBI Life and ICICI Prudential Life are trading at 3.2x and 2.5x their December 2021 intrinsic value, Gupta added.

“The IPO of LIC will not crowd out the supply of capital and money from the market. The IPO is well sized considering the constraints of the market. The government has long been committed to listing LIC listing and listing of LIC is a long-term strategic vision of the government,” Secretary DIPAM Pandey said at a press conference on Wednesday. DIPAM stands for Direction des Investissements et de la Gestion des Biens Publics .

Pandey also said it will be the biggest IPO in India despite the small offering size of Rs 21,000 crore.

Even after the reduced size of Rs 21,000 crore, LIC’s IPO will be the biggest initial public offering ever in the country. So far, Paytm’s initial public offering (IPO) is the largest at Rs 18,300 crore in 2021, followed by Coal India Ltd at Rs 15,500 crore in 2010 and Reliance Power at Rs 11,700 crore in 2008.

The insurance giant has set the price range within the range of Rs 902-949 per share for the public offering. The government is offloading 3.5% of its stake in LIC. Thus, approximately 21,000 crores of the company’s shares will be offered for sale during the offering. The size was significantly reduced following the Russian-Ukrainian war and volatile market conditions across the world.

A significant portion of the LIC’s upcoming IPO, up to 22,137,492 shares or 10% of the issue, has been reserved for LIC policyholders, according to the Red Herring Prospectus (RHP). Up to 1,581,249 shares or 0.70% of the offering have been reserved for eligible employees.

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