Life Insurance Corporation of India will hit the markets in May in the country’s largest ever public listing, albeit at a much cheaper price than initially expected. A dominant player with a loyal customer base across India may seem like a good bargain in turbulent times, but investors must take into account the baggage of government ownership.
With no end in sight to rocky market conditions, India’s central government has decided to push ahead with the listing of the state-backed behemoth by sharply slashing the size of the public offering. The Indian government will sell a 3.5% stake in LIC, according to the final prospectus filed with exchanges on Tuesday, raising as much as $2.74 billion at the top end of the price range. The previous plan was to offer a 5% stake for about $8 billion.
That roughly 50% cut in valuation isn’t all that shocking, as the timing of the IPO couldn’t have been worse with foreign funds continuing to pull out of the South Asian nation on mounting worries of inflation, a potential global recession and the impact of the continuing war in Ukraine. But the government is desperate to plug a budget deficit, and quickly unloading shares of one of the largest public-sector companies seems the only way out.
At a valuation of about $78 billion, LIC would trade at around 1.1 times the embedded value stated in its prospectus. Embedded value measures the present value of the future income from an insurer’s policies. That is a much lower multiple than that of private Indian insurers HDFC Life at 3.85 times and 2.36 for ICICI Prudential.
LIC has a lot going for it which may make the current offering good value. The 65-year-old firm has almost $500 billion in assets, 250 million policyholders and makes up almost two-thirds of the Indian market. It enjoyed an undisturbed monopoly until 2000. According to a UBS research report from February, nearly 10 out of every 100 rupees saved by Indian households each year goes to LIC.
But strong customer loyalty and a near monopoly aren’t enough. Government-owned enterprises trade at a discount to private rivals for solid reasons, such as decision making that is not solely driven by the profit motive. Only now has LIC decided to gradually reduce the share of investment surpluses increasing to participating policyholders to 90%, in line with the rest of the industry. Until recently, participating policyholders got 95% of all surpluses. The value of new business margin, a metric of insurance profitability, was 9.3% for LIC in the first half of the fiscal year that ended in March versus 26.4% at HDFC Life and 27.3% at ICICI Prudential.
Stock of another state-owned enterprise, General Insurance Corp. of India (GIC), has performed poorly since its IPO in 2017 due in part to its aggressive pricing. An unexpected tax rate change made by the government after the listing hurt the company severely, even though it helped government coffers.
In short, the government isn’t too off the mark with the new price band for LIC. Pricing the offer conservatively will make it more likely that shareholders make some money now and be more forthcoming for future stake sales when the market is in better shape.
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