Before you apply for LIC IPO shares, here's what you need to know
As LIC gears up for a public listing in March 2022, the hype surrounding it is something that cannot be missed. LIC is India's biggest IPO yet and will change India's IPO history forever. Not only IPO history, but even India's disinvestment targets depend on the way the LIC IPO pans out.
Here are all the updates on the LIC IPO that you need to know at this point:
1. The company's proposal for an IPO was recently approved by the Insurance Regulatory and Development Authority (IRDAI) and now the proposal has been offered to the SEBI to take the process forward by way of a draft red herring Prospectus.
What is a Draft Red Herring Prospectus (DRHP)?
It is the initial legal document that has to be filed by a company when it wants to raise funds from the public via shares. The company has to communicate this to the official authority that lets the stocks to be traded. This document basically has details about the business description, the financial information, risk factors, use of proceeds, industry overview and management and is important for its investors and stakeholders.
As per the DRHP, 31,62,49,885 (31.62 crore) equity shares are on offer for sale (OFS) and the LIC's embedded value has been finalised at more than Rs 5 trillion ($ 66.82 billion). The Central government is mulling to offload 5% of the shares it owns in LIC, in which it holds about 6.32 billion shares.
2. The embedded value of the company has been shown at over Rs 5 lakh crore.
What is Embedded Value?
Embedded value (EV) is a common valuation measure which is used mainly by life insurance companies to estimate the consolidated value of interest in an insurance company. All future profits that might arise to the company are calculated and are discounted to show the appropriate value of the money as on today. This value is added to the net asset value (NAV) of the firm's capital and surplus. It is also known as market consistent embedded value (MCEV). This value is important because it helps the investors compare the performance of this company to that of other Life Insurance Companies.
The interesting thing is how the Embedded Value of LIC has gone up 5 times from Rs 95,605 crore in FY 21 to Rs 5,39,686 crore in FY 22, thanks to a change in the way LIC holds and distributes its surplus.
LIC distributes 95% of its profits to policyholders and 5% of it to its shareholders (i.e the government) by way of dividends. Now policyholders are divided into two types: the participating and the non-participating types. Now, LIC used to hold one consolidated fund where it held its surplus from all policies for distribution but now, going forward, it has divided this into Income from Participating Policies and Non-Participating Policies, thanks to an amendment in Finance Act 2021.
As per the Act, all life insurers mandatorily have to hold two separate funds for surpluses generated from participatory and non-participatory policies. Further, shareholders can get 100 percent of non-participatory surplus while they continue to get up to 10 percent from the participatory fund.
Why this is important is because the non-participatory fund goes entirely to the shareholders and this part has continously increased over the years.
Earlier, LIC used to have a small allocation for Non-Participating Policies and a larger chunk for Participating Policies. But this growth will be reflected only from the current year onwards, as the disclosure was not required previously. This disclosure in itself has raised profits available to shareholders, and has increased the value of the business.
HOW DOES THIS AFFECT VALUATION?
Private insurance companies trade at about 3-4 times the embedded value of a company.
Considering a moderate factor of 2 or 3, and considering an embedded value of Rs 5.39 lakh crore, the valuation might be between a range of Rs 10.78 to 18.78 lakh crore (i.e 5.39 *2 to 5.39*3).
The issue size might be between Rs 53,500 crore to Rs 93,625 crore (i.e 10.78 Lakh Cr *5% to 18.78 Lakh Crore*5%).
What can the expected price be?
Considering 632 crore shares are present of which only 5% are issued via the IPO, the shares available would be 31.6 crore.
When the issue size is Rs 53,500 crore and the shares available are 31.6 crores, the issue prize range may begin from Rs 1,700.
When the issue size is Rs 93,625 crore and the shares available are 31.6 crores, the issue prize range may range up to Rs 2,970.
What more?
3. LIC’s IPO will have a 50% reservation for Qualified Institutional Buyers (QIB), and at least 15% allocation for the Non-Institutional Investors (NII). This will leave 35% of the public issue for retail investors, while Policyholders will not get more than 10% of the issue size and employees will get about 5% quota of the issue size.
LIC has 29 crore policyholders and over 13 lakh agents vs an approximate 7.3 crore existing demat account holders in India, as of October 2021. These LIC policyholders may get about 5-10% discounts in the IPO as LIC wants to target retail customers to make it a widely subscribed IPO.
4. LIC holds around $507.33 billion in total assets as of Fiscal 2021, making it the 8th largest insurance company in the world, and had a CAGR growth of 8% between Fiscal 2017 and 2021. The DRHP does not help us with any information on the price points of the issue, the exact discounts, valuation, and the total issue size. But LIC’s IPO may help the government reach its revised divestment target of Rs 78,000 crore when it hits the streets in March 2021.
5. When it comes to investments as on September 2021, LIC holds investments worth Rs 39.56 trillion. LIC's majority of assets under management (AUM) are invested in Central Government securities (37.45%), Equities (24.77%) and State government securities (24.62%) respectively.
Similarly, the government is in the process of approving a 20% foreign investment limit in LIC to rope in foreign investors to make the IPO a huge success.
6. In FY 21, the Net Premium Income was 4.02 lakh crore while the total revenue was Rs 6.82 lakh crore. LIC conducts overseas operations in Fiji, Mauritius and United Kingdom. The company also has joint ventures with LIC BSC Bahrain, LIC Nepal, LIC Lanka, Kenindia Assurance Company, Saudi Indian Company, LIC of Bangladesh and LIC Singapore.
7. LIC is the parent company of LIC Housing Finance and IDBI Bank, and since RBI Rules do not allow two sub-entities to continue the same business, either of the two subsidiary entities will have to close its business. Since this might reduce the future cashflow of LIC's business, this has been mentioned in the DRHP.
8. The two things that policyholders need to be able to apply for LIC's IPO are: a) The policyholder's PAN should be updated on the LIC portal; b) Policyholder should have a demat account.
9. LIC also came up with a new option for the policyholders whose policies have lapsed during the year. This will help more people to apply for the IPO as lapsed policies do not allow policyholders to apply for the IPO.