DH Deciphers | LIC: Why is India's biggest IPO such a big deal?

The Life Insurance Corporation (LIC) is set to file for an initial public offering (IPO) on March 11 in what is certain to be the largest in India's history at $8 billion (Rs 60,000 crore). The insurer will be offering a 5% stake or about 31 crore shares, testing the appetite of investors who had a stellar rally last year. So why is the LIC selling stock to the public? Are investors really going to embrace it enthusiastically?

Just how big is LIC?

The LIC was established by the union government in 1956 with $10 billion in seed capital following the nationalisation of the insurance sector. The Mumbai-headquartered insurer has since become a household name as it boasts a strong omnichannel distribution network with over one lakh employees, nearly 2,000 branches and about 286 million policies. It has nearly $530 billion in assets and 250 million policyholders, possessing about 64% of the market share. It's so dominant that it issues three out of four individual policies. It's also the investor of the last resort as the government routinely uses it to bail out struggling financial institutions. Currently, it has investments in over 370 companies with a majority stake in 35 of them. Globally, it's the 10th most-valued insurance company in terms of assets and has an embedded value of $72 billion.

Also read: Business mix tweak will have LIC becoming bigger threat to pvt players: Report

Embedded value, what's that?

Life insurance companies typically use this metric to value themselves. The embedded value is the present value of future profits plus adjusted net asset value. NAV is the book value of its assets minus its liabilities.

What will be the market cap of LIC?

Using the embedded value method, India’s current top-listed insurer, SBI Life Insurance, trades at three times its per-share embedded value. Applying this metric, the LIC’s post-IPO market capitalisation would be $216 billion, as per Bloomberg. That would be more than Reliance Industries Limited (RIL), India's most valuable company. Whoa!

Why the IPO? Doesn't LIC have enough money?

The government has been selling public-sector entities because it wants to bring down the fiscal deficit and get out of the business of doing business. In the 2021-22 financial year, the fiscal deficit rose drastically to 9.5% of the GDP as the government increased spending to fund schemes to support those battered by Covid-19. While the initial budgeted revenue target from divestment was Rs 1,75,000 crore for FY22, it has been substantially scaled down to Rs 78,000 crore. The LIC's draft red herring prospectus, however, mentions that the listing is to “enhance our visibility and brand image as well as provide a public market for the equity shares in India”.

Selling public-sector entities... isn't that's a political hot potato?

It indeed is. Some social activists have criticised the share sale, claiming the government has bypassed important rules to get the insurance behemoth listed for the sake of meeting its disinvestment target and disregarding the social cause that the LIC serves for the marginalised sections of society. They say that the "non-transparent valuation, harmful structural change and alteration in profit distribution after listing" would prove to be detrimental for the brand value that the LIC carries. Among them is a former secretary of economic affairs, E A S Sarma, who says that the IPO is "illegal, unconstitutional and against the interests of the people of India".

What might the IPO mean for the market?

The IPO has got investors excited and it's pretty obvious why. Who wouldn't want to invest in a company that controls nearly two-thirds of the market it serves? The IPO is likely to shed investments in the LIC's competitors. It's largely expected to bring cheers to the markets that were let down by some lacklustre IPOs last year. Many analysts have described the LIC IPO as India's Aramco moment, referring to the listing of the Saudi Arabian oil giant over two years ago in what was the world's biggest stock market debut.

But there's some worry, too. Aramco's IPO didn't quite meet the expectations. LIC has some pain points, and it would be interesting to know if investors disregard them all.

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