By K Raveendran
Given the hype and build-up for LIC’s Rs 21,000 crore dream IPO over a long time, the listing of the shares has turned out to be an anti-climax. Of course, the first day price is no indication of how the stock is going to perform over any term. But the debut has disappointed everyone, including the critics who are opposed to the idea conceptually.
India’s insurance behemoth started trading at Rs 872 per share, down 8.11 from the IPO price of Rs 949 per share. What made it even more glaring was that the poor price performance occurred on a day when the benchmark indices were making gains after a period of blood bath. Surprisingly, the scrip had traded on a discount even during the pre-listing grey market, indicating that the hype was misplaced. There was no cheer even for policy holders and employees, who had secured the stock at a discount.
Die-hard fans are not, however, dispirited. The stock market has of late been going through a rough patch, with global stocks witnessing of weeks of consistent selling over inflation worries, consequences of Putin’s Ukraine invasion and supply chain disruptions that have taken the clock back on post-covid recovery. So, the LIC’s stock market debut did not have a favourable backdrop.
Analysts have no doubt about the potential of the scrip, and the growth story in the country’s under-penetrated insurance industry. Among the strengths cited are sustained market leadership, formidable distribution network, and an impressive pipeline of innovative products that give the more ambitious private insurers a run for the money. LIC’s pre-eminence in the industry has made it a byword for insurance.
The LIC issue has faced strong opposition from left-oriented public opinion for abandoning yet another showcase public sector asset, something that has found an emotional bonding with the average Indian. People see an LIC policy much beyond an insurance and they have been encouraged to do so in view of its utility as well as usefulness as a means of life security. This takes LIC beyond mere numbers and ratios, which is what the market goes by.
Opposition parties have been accusing the government of undervaluation of such a great institution in its bid privatise the company. They are alleging that the government is undertaking the privatisation at throwaway prices. They also question the timing of the issue when the markets, both global and domestic, are in a turmoil on account of the Ukraine war and other developments. The government had earlier promised that the issue will not be launched until the market conditions are not favourable.
The government’s valuation methodology itself has been challenged. While filing of the LIC prospectus, it was envisaged that the government was aiming at 2.5 times of embedded value (EV) for valuation. But it finally settled at just 1.1 times, attracting criticism from all quarters.
Critics further point out that such low valuation is when comparable companies such as HDFC, SBI and ICICI Prudential are trading at much higher EV. HDFC Life, for instance, and is trading at 3.9 times, SBI Life at 3.2 times and ICICI Prudential Life at 2.5 times their embedded values. Accordingly, the LIC price band was paired down by the Modi government from Rs 1100 per share to a price band of Rs 902 – 949 per share for the IPO. This has been calculated as a loss of an estimated Rs 30,000 crore to the exchequer.
There has been further criticism about the methodology. Critics point out that EV is not the value of the company; it reflects the present value of future income streams that would be available to shareholders. They point out that the EV does not take into account the tremendous goodwill that LIC enjoys among the Indian public as well as its position as the most valuable brand in the country and its role in the company’s earning potential for future. Even a bigger problem is that the valuation has ignored the tremendous value of LIC’s real estate assets spread through the length and breadth of the country, many of them landmarks in metro cities. (IPA Service)