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Review By Dilip Davda on April 29, 2022

•    The numero uno life insurer of India is going public.
•    It has many credentials compared to all its listed/unlisted peers. 
•    With the IPO pricing, it is looking for a valuation of Rs. 6 lakh crore.
•    LIC is in process of changing its product mix and distribution channel under IRDA rules.
•    Investors may consider parking of funds with a long term perspective. 

PREFACE:
LIC IPO plans were announced in Fiscal Budget 2020 and in order to tweak its rule frame, change in the accounting system to match the listed entities, as well as a pandemic scare, it took a little over two years to hit the bullseye. Incidentally, this mega insurer cum long term investors cum financier has now opened its doors for investors across the board. Considering its financial play, it cannot be compared with listed peers in a clear totality.

At last, the wait is over for LIC's much sought maiden float. Well, as we all know, soon after filing its DRHP it became the talk of the town and we witnessed much gossip about its issue pricing, size, valuations etc. On those snippets, the conglomerate mulled raising around Rs. 68000 cr. with its maiden mega IPO with an expected price tag of around Rs. 2000 based on its embedded value. 

Thanks to the illiquid situation in global markets following the Russia-Ukraine war and the slowing down of the economy with rising inflation. The corporation is now all set with justification to its issue size and pricing and is coming out with its maiden IPO with a much lower valuation and also with a token dilution of around 3.5%. As known, the Government has always been investor-friendly and this time too it has shown the guts to take the hit and coming out with a most lucrative offer to raise around Rs. 21000+ cr. Still, it is a mega IPO in Indian history so far. (We are not considering here mega rights issues from Voda Idea, Airtel, and Reliance Industries that have already done fundraising above Rs. 24000 cr. In fact, Reliance raised Rs. 52000 cr. plus.)

ABOUT COMPANY:
Life Insurance Corporation of India (LIC) is the only PSU life insurer company in India since 1956 and was operating under a special LIC act till recently. But now it has come on board to pave the way for its maiden float under the IRDA regime. It has penetrated the domestic market and is the most trusted Brand. It follows its catch lines "Jindagi Ke Saath Bhi, Jindagi Ke Baad Bhi", "LIC that knows India better" and "Har Pal Aapke Saath" in the true sense. 

LIC has been providing life insurance in India for more than 65 years and is the largest life insurer in India, with a 61.6% market share in terms of premiums (or GWP), a 61.4% market share in terms of New Business Premium (or NBP), a 71.8% market share in terms of the number of individual policies issued, an 88.8% market share in terms of a number of group policies issued for the nine months ended December 31, 2021, as well as by the number of individual agents, which comprised 55% of all individual agents in India as at December 31, 2021. (Source: the CRISIL Report). 

LIC's market share in the Indian life insurance industry for Fiscal 2021 was 64.1% in terms of GWP, 66.2% in terms of NBP, 74.6% in terms of the number of individual policies issued, and 81.1% in terms of the number of group policies issued. (Source the CRISIL Report). It had the highest gap in market share by life insurance GWP relative to the second-largest life insurer in India as compared to the market leaders in the top seven markets globally (in 2020 for the other players and in Fiscal 2021 for LIC). (Source: the CRISIL Report). According to CRISIL, this is owing to LIC's enormous agent network, strong track record, immense trust in the brand 'LIC' and 65 years of lineage. (Source: the CRISIL Report). LIC is ranked fifth globally by life insurance GWP (comparing its life insurance premium for Fiscal 2021 to its global peers' life insurance premium for 2020) and 10th globally in terms of total assets (comparing its assets as of March 31, 2021, with other life insurers' assets as at December 31, 2020). (Source: the CRISIL Report).

LIC is the largest asset manager in India as of December 31, 2021, with AUM (comprising policyholders' investment, shareholders' investment and assets held to cover linked liabilities) of Rs. 40.1 trillion on a standalone basis, which was (i) more than 3.2 times the total AUM of all private life insurers in India, (ii) approximately 15.6 times more than the AUM of the second-largest player in the Indian life insurance industry in terms of AUM, (iii) more than 1.1 times the entire Indian mutual fund industry's AUM and (iv) 17.0% of India's estimated GDP for Fiscal 2022. (Source: the CRISIL Report). 

As per the CRISIL Report, as of December 31, 2021, LIC's investments in listed equity represented around 4% of the total market capitalisation of NSE at that date. (Source: the CRISIL Report). LIC was formed by merging and nationalizing 245 private life insurance companies in India on September 1, 1956, with an initial capital of Rs. 50.00 million. From its incorporation until 2000, it was the only life insurer in India. LIC was identified by IRDAI as a Domestic Systemically Important Insurer ("D-SII") on the basis of size, market importance and domestic and global inter-connectedness in September 2020. Its brand, LIC, was recognised as the third strongest and 10th most valuable global insurance brand as per the "Insurance 100 2021 report" released by Brand Finance. The strength of a brand means the efficacy of a brand's performance on intangible measures relative to its competitors and is determined by looking at the brand's marketing investment, stakeholder equity and impact of those on business performance.

LIC's individual product portfolio in India comprises 32 individual products (16 participating products and 16 non-participating products) and seven individual riders. Its group products comprise (i) group term insurance products, (ii) group savings insurance products; (iii) group savings pension products; and (iv) group annuity products. LIC's group product portfolio in India comprises 11 group products.

As of December 31, 2021, LIC had 2,048 branch offices and 1,559 satellite offices in India, covering 91% of all districts in India. Its multi-channel distribution platform for group products comprises (i) its employees in the sales team for group products, (ii) individual agents, (iii) bancassurance partners and (iv) alternate channel partners (other corporate agents and brokers).

In addition to its operations in India, the corporation has one branch in each Fiji, Mauritius and the United Kingdom and subsidiaries in Bahrain (with operations in Qatar, Kuwait, Oman and the United Arab Emirates), Bangladesh, Nepal, Singapore and Sri Lanka in the life insurance industry. For Fiscal 2019, Fiscal 2020, Fiscal 2021 and the nine months ended December 31, 2021, on a consolidated basis, its premium from outside India represented 0.93%, 0.99%, 0.73% and 0.69%, respectively, of the total premium.

Though it has competition from private players, it is still a numero uno life insurer in India on all counts and will continue to be so considering its role. 

ISSUE DETAILS/CAPITAL HISTORY:
To meet the Government of India's disinvestment programme, listing benefits, LIC is coming out with a maiden IPO of 221374920 equity shares of Rs. 10 each via a book building route. It has fixed the price band of Rs. 902 to Rs. 949 and mulls raising Rs. 21008.48 cr. at the upper price band. Minimum application is to be made for 15 shares and in multiples thereon, thereafter. The issue opens for subscription on May 04, 2022, and will close on May 09, 2022. 

The corporation has reserved 22137492 shares for policyholders (who are the original pillars of the corporation) and offering them a discount of Rs. 60 per share. For eligible employees, it has reserved 1581249 shares. For the Retail and Employees category, it is offering a discount of Rs. 45 per share. From the residual portion, it has allocated 50% for QIBs, 15% for HNIs (for new 2 categories created) and 35% for Retail investors. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 3.50% of the post-IPO paid-up capital of the corporation. 

Joint Book Running Lead Managers for this issue are Kotak Mahindra Capital Co. Ltd., Axis Capital Ltd., BofA Securities India Ltd., Citigroup Global Markets India Pvt. Ltd., Goldman Sachs (India) Securities Pvt. Ltd., ICICI Securities Ltd., JM Financial Ltd., J. P. Morgan India Pvt. Ltd., Nomura Financial Advisory and Securities (India) Pvt. Ltd. and SBI Capital Markets Ltd., and KFin Technologies Ltd. is the registrar to the issue. 

Having issued initial equity at par, LIC converted dividends for FY20 into equity and also issued bonus shares in the ratio of 6.227 for 1 (9.85% on a pre-offer basis) as well as 7.751 for 1 (88.57% on a pre-offer basis) in September 2021. The average cost of acquisition of shares by the GoI is Rs. 0.16 per share. 

Post-IPO, LIC's paid-up equity capital will remain the same at Rs. 6325.00 cr. as this is a pure secondary offer. At the upper cap of IPO pricing, the corporation is looking for a market cap of Rs. 600242.28 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscal, LIC has (on a consolidated basis) posted a total income/net surplus (deficit) of Rs. 570809.57 cr. / Rs. - (2416.10) cr. (FY19), Rs. 645605.47 cr. / Rs. - (10148.93) cr. (FY20) and Rs. 703709.45 cr. / Rs. 3861.82 cr. (FY21). For the first nine months of FY22 ended on December 31, 2021, it has earned a net profit of Rs. 1642.81 cr. on a total income of Rs. 512279.21 cr. 

Total surplus for all these periods stood at Rs. 52971.19 cr., Rs. 49728.67 cr., Rs. 61698.91 cr. and Rs. 6337.94 cr. One has to bear in mind that as per historical data, maximum business and revenues generated by all insurance companies in the last quarter of the fiscal and hence annualizing of first nine months of working will never present a true picture. 

For the last three fiscals, LIC has posted an average EPS of Rs. 4.47 and an average RoNW of 182.25%. The issue is priced at a P/BV of 72.94 based on its NAV of Rs. 13.01 per share as of December 31, 2021, and on a post IPO basis. 

Based on FY21 earnings, the issue is priced at a P/E of around 201.91 (at the upper cap) making it a highly-priced issue on a prima facie basis. But considering the corporation's size and the premier position in its field with a market share of the business, it can be termed a full-priced offer. On other parameters, it can be treated as a reasonably priced issue as LIC enjoys a premier position against the second-best in the industry and it should get mirrored in the valuations. 

EMBEDDED VALUE:
We had no knowledge of the embedded valuation of insurers till the LIC IPO debate started. According to the merchant banker's lobby, globally embedded valuation is the main parameter for insurance companies and hence they started creating awareness on this aspect. 

The embedded value of listed life insurers  SBI Life, HDFC Life and ICICI Prudential is between 2.4 to 4.05 against LIC's 1.1 with its lucrative pricing. 

Now that LIC is under SEBI and IRDA regimes, it will have to match parameters like other listed peers. The corporation is gearing for change in its distribution policy from 95% / 5% to 90% / 10% within two years. Due to these initial hiccups, it might face some irks, but once it is fully on board, it will regain its leadership raising its embedded valuation in coming years. 

DIVIDEND POLICY:
LIC has been the dividend-paying corporation and has declared dividends of 42.10% for FY19 and 42.70% for FY20. In fact, the dividend for FY20 was converted into equity shares. For all the while till FY21, the Government of India (GoI) was the sole stakeholder. While it gave a dividend to GoI, it kept distributing a major chunk of profits among its policyholders (the main pillars). 

Post listing, LIC will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer documents, LIC has shown SBI Life, HDFC Life and ICICI Prudential as its listed peers. They are currently trading at a P/E of 73.61, 101.84 and 100.25 (as of April 29, 2022). However, they are not truly comparable on an apple to apple basis. 

MERCHANT BANKER'S TRACK RECORDS:
The track records of ten BRLMs associated with this issue are as under:
1.   Kotak Mahindra: This is the 26th mandate from Kotak Mahindra in the last three fiscals (including the ongoing one). Out of the last 10 listings, 4 opened at discount and the rest with premiums ranging from 0.04% to 79.38% on the day of listings. 
2.   Axis Capital: This is the 37th mandate from Axis Cap in the last three fiscals (including the ongoing one). Out of the last 10 listings, 3 opened at discount and the rest with premiums ranging from 1.16% to 169.04% on the day of listings. 
3.    BofA Securities: This is the 10th mandate from BofA Securities in the last four fiscals (including the ongoing one). Out of the last 9 listings, 4 opened at discount and the rest with premiums ranging from 0.04% to 79.38% on the day of listings. 
4.    Citigroup: This is the 12th mandate from Citigroup in the last three fiscals (including the ongoing one). Out of the last 10 listings, 5 opened at discount and the rest with premiums ranging from 0.04% to 79.38% on the day of listings. 
5.    Goldman Sachs: This is the 3rd mandate from Goldman Sachs in the last three fiscals (including the ongoing one). Out of the last 2 listings, 1 opened at discount and 1 with a premium of 4.32% on the day of listings. 
6.    ICICI Securities: This is the 41st mandate from ICICI Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, 4 opened at discount and the rest with premiums ranging from 0.06% to 169.04% on the day of listings. 
7.    JM Financial: This is the 26th mandate from JM Financial in the last three fiscals (including the ongoing one). Out of the last 10 listings, all opened with premiums ranging from 0.04% to 79.38% on the day of listings. 
8.   J.P. Morgan: This is the 6th mandate from J.P. Morgan in the last three fiscals (including the ongoing one). Out of the last 5 listings, 4 opened at discount and 1 with a premium of 3.92% on the day of listings. 
9.    Nomura: This is the 12th mandate from Nomura in the last three fiscals (including the ongoing one). Out of the last 10 listings, 4 opened at discount and the rest with premiums ranging from 3.92% to 80.74% on the day of listings. 
10.  SBI Cap: This is the 18th mandate from SBI Cap in the last three fiscals (including the ongoing one). Out of the last 10 listings, 5 opened at discount and the rest with premiums ranging from 0.04% to 103.11% on the day of listings. 

Special Disclaimer: Being a pension policyholder of LIC, my family will consider a moderate investment in this historic IPO for long term rewards.

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