What makes LIC IPO a long-term investment bet?

The much-awaited IPO of Life Insurance Corporation is set to open for subscription today, after it recorded bumper participation from anchor investors. Find out if you should subscribe to it.

The initial public offer of Life Insurance Corporation is set to open for subscription today.

At Rs 21,000 crore, the offer will be India’s biggest issue till date. The next two biggest issues that hit the Street in the past were that of Paytm-owner One97 Communication, and state-run Coal India.

Globally, this is the world’s fifth biggest IPO in calendar year 2022.

LIC IPO witnessed robust traction from leading investors including SBI Mutual Fund, Axis Mutual Fund and Aditya Birla Sun Life MF.

The company raised around Rs 5,627 crore from anchor investors on Monday, at Rs 949 per share.

However, much of this amount was raised with the help of domestic mutual funds as foreign funds invested little over Rs 1,600 crore.

Analysts say the low demand may be because of the present risk aversion among foreign portfolio investors.

Nonetheless, the government is hoping to see bumper subscription levels for LIC, riding on the back of retail and non-institutional investors.

Over 8,500 crore rupees worth of shares have been reserved for retail investors, policyholders and employees in the IPO.

LIC policyholders are entitled to a discount of 60 rupees over the issue price, the retail investors will be offered the issue at a discount of Rs 45 per equity share.

Therefore, if you are someone who is wondering whether to apply for India’s biggest IPO amid market volatility, here’re the key things that you should know.

LIC’s total assets under management is over 3.2 times the total AUM of all domestic private peers. It also enjoys premium based market share of 64%.

At the upper price band of Rs 949, LIC is available at a price-to-embedded value of 1.1x, which is at a discount of 65% compared to the average valuation of private life insurance players.

This valuation, analysts believe, factors-in most of the negatives that the insurer is currently facing.

Speaking to Business Standard, Nirav Karkera, Head of Research at Fisdom says LIC is conceding market share to private peers, and its huge dependence on sales agent network could be a vulnerability. LIC’s profitability, margins remain under pressure, he says.

The company’s lower value of new business margin, that is indicative of profit margin, was at 9.9% for FY21 compared with 23-26% for private players.

It further has lower short-term persistency ratio relative to private peers, which shows lower customer stickiness.

However, the insurer’s strong market presence, coupled with the highest return on equity ratio, domestically, is keeping analysts bullish on the issue.

According to Karkera, LIC is capable of recouping lost ground and the IPO could be a long-term value creation story. LIC’s growth prospects outweigh challenges, he says.

B Gopkumar of Axis Securities, too, sees LIC as a long-term investment bet. While he expects the near-term market volatility to weigh on the stock performance, he believes the under penetration of insurance and improving financialisation of savings could make LIC a long-term value bet.

Given this, analysts remain uncertain about the initial listing gains, but view the IPO as a mid-to-long term investment opportunity.

As of Tuesday, the stock was commanding a premium of Rs 60 per share, indicating a likely listing gain of 6%.

Overall, though the markets are volatile, analysts believe there is enough liquidity in the Indian markets for a large issue like LIC to get enough subscriptions.