LIC-IDBI Bank deal: Large exposure to PSUs hurts insurer returns

Insurer's stock portfolio has underperformed the Sensex

Life Insurance Corporation (LIC) has bailed out several public sector companies — the acquisition of a majority stake in loss-making IDBI Bank being the latest — but these investments have resulted in the underperformance of the insurer’s equity portfolio.

The country’s largest insurer, which has large shareholdings in public sector undertakings (PSUs) and public sector banks (PSBs), has not been able to beat the benchmark BSE Sensex index.

The value of LIC’s equity portfolio (adjusted for incremental investment in the intervening period) is up around 65 per cent since March 2012 against doubling of the Sensex during the period. Also, the combined market capitalisation of companies in the insurer’s portfolio went up 103 per cent, while the broader BSE-500 index surged 115 per cent in six years. The insurance major is estimated to have made incremental investment worth Rs 685 billion in all PSUs in the last six years, accounting for nearly half (48.5 per cent) of all new stock exposure in the period. The estimate is based on quarterly changes in the LIC’s shareholding in companies and their average quarterly share price.

At the end of the March 2018 quarter, LIC held a stake (more than 1 per cent) in 376 listed and actively traded companies. The stake was worth around Rs 6 trillion at the end of June, up from Rs 2.8 trillion at the end of the March 2012 quarter. A large part of the increase in portfolio value is, however, due to incremental share purchases by LIC in the period.  

The analysis is based on the shareholding pattern of listed companies in which LIC owns over 1 per cent stake, and their quarter-end market capitalisation for the last 25 quarters. The latest shareholding data is for the March 2018 quarter. The latest market cap data is for the period ending June. March 2012 was chosen as the base period for comparison, as that was when LIC owned a 5.5 per cent stake each in PSUs and private sector companies.

Experts attribute LIC’s relative underperformance to its large incremental investments in government-owned companies, whose share prices grossly underperformed the broader market during the period.

“In the last few years, LIC has emerged as the single-largest buyer of PSU stocks, both in the secondary market and the primary market through its participation in follow-on offers (FPOs) and initial public offers (IPOs). This has negatively impacted the market value of LIC’s equity portfolio as PSU stock prices have failed to keep pace with the rise in the broader market,” said G Chokkalingam, founder & MD, Equinomics Research & Advisory Services.

There has been a steady rise in LIC’s stake in government-owned companies from an average of 5.5 per cent in the March 2012 quarter to 7.7 per cent at the end of March this year. The increase would have been even steeper if not for more than doubling of PSBs’ paid-up capital (due to recapitalisation), which diluted LIC’s stake in most banks despite large incremental share purchases by the insurer over six years. Its stake in non-bank PSUs nearly doubled in the period to 7.4 per cent on average from 4 per cent at the end of March 2012.

The combined market capitalisation of PSUs was up 25 per cent between March 2012 and March 2018, while PSBs’ combined market capitalisation was up 29 per cent largely due to a 130 per cent increase in their share capital after fundraising. PSBs’ share prices are down around 43 per cent on average, forcing the insurer to make losses in its investments in these banks.

Government-owned companies now account for a little less than a quarter of LIC’s equity portfolio in value (in rupee terms), down from 31.7 per cent in the March 2012 quarter. PSU stocks, however, now account for 52.7 per cent of all shares owned by LIC, up from 41.5 per cent at the beginning of the period.

For example, LIC now owns 10.3 per cent of Coal India, up from a 1.2 per cent stake five years ago. Similarly, its stake in NTPC rose from 3.8 per cent six years ago to 12.2 per cent now. In Bharat Heavy Electricals, LIC’s stake is up to 14 per cent from 6.8 per cent in March 2012. In the same period, its stake in SAIL more than doubled to 10.3 per cent from 4.7 per cent earlier. In all, the insurance major owns 10 per cent or more stake in 17 central public sector companies.

In contrast, LIC cut its exposure to many of the top performing companies in the private sector. For example, LIC’s stake in HDFC Bank, the country most valuable bank, is now down to 2 per cent from 6.1 per cent in March 2012. Other stocks where LIC was a net seller during the period include Hindustan Unilever, Maruti Suzuki, Larsen & Toubro, Kotak Mahindra Bank, Mahindra & Mahindra and HCL Technologies, all excellent performers in the past six years.

Analysts expect the trend to continue given the central government’s tight fiscal balance. “As the government is not in a financial position to meet the full capital requirement of public sector banks, it has turned to LIC to pick some of the tab. In non-bank PSUs, LIC acts as an investor of last resort allowing the government to raise money through divestment,” said Dhananjay Sinha, head of research, Emkay Global Financial Services.

In the long run, this strategy exposes LIC’s policyholders to financial risk unless large PSUs start making money for the insurer.