Valuation of IPO-bound LIC based on global peers' m-cap, return prospects

The government believes LIC's valuation would surge, following the insurer's lisiting

The market valuation of the country’s biggest insurance firm, Life Insurance Corporation (LIC), has been pegged at Rs 6 trillion after taking into account the market value of global insurers, such as Shenzhen-based Ping An Insurance, and growth prospects of LIC's return on embedded value (RoEV), according to a government official.

Investors, in their consultation with the government, cited the market cap of Ping An Insurance, which is around 0.7 times its embedded value. LIC’s projected valuation is currently pegged at a premium of 1.1 times its embedded value of Rs 5.4 trillion, considering that India is an underpenetrated insurance market and the insurer’s potential to expand its business, the official said.

On Saturday, LIC’s board approved a reduction in the issue size of its initial public offering (IPO), with the Centre now looking to sell 3.5 per cent of its stake in LIC for Rs 21,000 crore. The government would keep the option to increase the issue size by another 1.5 per cent based on the demand, taking the total size to Rs 30,000 crore.

When LIC had filed the draft red herring prospectus (DRHP), experts had pegged its valuation at two to three times its embedded value (Rs 11-16 trillion), based on the valuation of its private sector peers. However, market volatility due to the Russia-Ukraine war changed the dynamics, and made investors jittery. Several large foreign investors have decided to give the IPO a miss.

During consultations with the government, investors projected 10-11 per cent growth in LIC’s RoEV, a metric that measures an insurer’s profitability for investors. This 10-11 per cent growth has been estimated considering LIC’s current growth at 9 per cent, the official said. LIC did not have RoEV projections because of lack of historical data for embedded value, the official added. LIC’s domestic peers, SBI Life and HDFC Life, had an operating RoEV of 19.1 per cent and 18.5 per cent in FY21. 

However, given the size of LIC, steady 10 per cent growth in embedded value would be way higher than the 25 per cent growth in competition’s embedded value in absolute terms, the official said.

This high growth, in formative years, had helped private sector insurers command a higher embedded value multiple as their valuation (around 2 to 3 times), the official said. However, a higher valuation based on embedded value doesn’t bring them close to LIC’s valuation, he said.

Even as LIC has the biggest market share and leads in segments, such as group insurance, investors have also pointed out that the insurer has lost market share to private sector players with an 8 per cent growth as compared to a 23 per cent growth recorded by the private sector in March 2022.

The government also believes LIC’s valuation would be higher once shares of the insurer list on the exchanges, and wants investors to gain from the same. The war made things difficult, and spoiled the Centre’s plan for India’s largest public offering. Even as big-ticket foreign investors, which the Centre was luring during the roadshows, have decided not to participate in the IPO, they would judge the insurer’s performance after its listing, and take investment decisions, said the official quoted above.

Govt files updated DRHP for LIC IPO

The Centre and Life Insurance Corporation of India (LIC) have filed another updated draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (Sebi) including revised offer details of the insurer’s initial public offering. 

The updated DRHP filed with Sebi specifies a reduction in the issue size of LIC IPO to 3.5 per cent which the regulator will have to approve. (BS Reporter)