LIC insurance for New India Assurance's mega IPO

State-owned giant makes Rs 9,000-cr bid on first day of latter's offer

Life Insurance Corporation of India (LIC) has again acted as a white knight, to ensure success of The New India Assurance Company’s Rs 9,600-crore Initial Public Offering (IPO), through which the Centre is eyeing Rs 7,680 crore.

New India garnered full subscription on Wednesday for its IPO, the country’s fourth largest. It was the issue’s first day and got bids for 125 million shares, as against 120 mn on offer. However, the bulk of the bids were from domestic institutional investors (DIIs), mainly LIC. Excluding DII bids, all others were worth a little less than Rs 230 crore, about 2.4 per cent of the issue size.

“LIC through multiple brokers has placed large bids. The total application size of LIC could be anywhere between Rs 8,500 crore and Rs 9,500 crore. LIC’s investment is crucial to ensure that the offering sails through, as overseas investor participation in recent IPOs has been muted,” said an investment banker, asking not to be named.

A text sent to a senior LIC official to ascertain the bid amount wasn’t answered.  

Foreign institutional investors (FIIs) didn’t place a single bid on the first day. Typically, most investors apply on the last day of an IPO. Market players say big-ticket investment by LIC in a government share sale has become a regular feature. Last month, LIC had made an application worth Rs 8,000 crore on the first day of the Rs 11,400-crore IPO of General Insurance Corporation (GIC), the state-owned reinsurer. LIC was allotted shares worth Rs 5,640 crore, amounting to 7.05 per cent stake in GIC.

New India, too, might accept only a portion of LIC’s bids if overall demand for the IPO is healthy. However, it is unlikely that the offering will see huge subscription; most analysts have termed the valuations as expensive. The price band for the IPO is Rs 770 to Rs 800 a share, valuing the country’s largest general insurer at Rs 63,448 crore to Rs 65,920 crore. 

“At the higher end of the band, the issue is priced at 5.2 times its FY17 book value (BV) and at 1.8 times its BV, including fair value change account). It appears expensive, considering a mere 6.8 per cent return on equity (RoE), operating loss of Rs 901 crore and declining net profit,” says a note by Centrum Broking, which gave an ‘avoid’ call on the IPO.

Jaikishan Parmar, research analyst at Angel Broking, says given New India's subdued RoE, inconsistent profit growth and higher combined ratio, they assigned a ‘neutral’ rating for the IPO.

New India is looking to raise Rs 1,600 crore through the IPO, for being used to meet future capital requirements, improving the solvency margin and solvency ratio. Some analysts say New India is favourably priced compared to some of the private sector peers. And, investors with a long-term investment horizon could consider the IPO. 

The Centre has set its 2017-18 disinvestment target at Rs 72,500 crore. So far, it’s got Rs 30,186 crore.  The New India IPO and the subsequent Bharat-22 ETF will add another Rs 16,000 crore. An expected shortfall in tax collection and need for higher fiscal spending to stimulate the economy has made it important to meet this target.