Geojit gives ‘subscribe’ rating to LIC’s IPO

New Delhi: Life Insurance Corporation of India (LIC) will launch its initial public offering (IPO) on May 4. Under the offer, the government will sell 3.5 per cent stake in the country’s largest life insurance company. at the upper end of the price band 902-949 per share, the government aims to increase 21,000 crores.

issue received Strong response from institutional investorsWith 5,620 crore shares are reserved for anchor investors to be fully subscribed. Investors including Norwegian wealth fund Norges Bank Investment Management and Singapore sovereign wealth fund GIC were allotted shares of LIC before the sale began to the public.

A recent note by Geojit Financial Services (Geojit) recommends subscribing to LIC’s IPO on a short-to-medium term basis, which will close on May 9.

The note highlights some of the key features of LIC.

The insurance giant is the largest asset manager in India with assets under management (AUM) 36.8 trillion by March 2021, which is more than three times the total AUM of all private life insurance companies. Enjoys a strong market share of 62% on total premium basis and around 61% on new business premium basis as of FY 2012 (nine months).

attractive valuation

In terms of valuation also, the note is positive about the IPO. At the upper end of the price band, LIC is available at a P/EVPS of 1.1 times (Value to Embedded Value Per Share) which is at a discount of 65% compared to the average valuation of private life insurance players. As per the note, the current valuation is attractive given LIC’s strong market presence, change in surplus distribution norms and improving profitability due to a strong sector growth outlook. This decline is despite adverse conditions such as market share, low short-term persistence ratio and sub-par margins.

LIC has a lower short-term persistence ratio (13th month-76.8%) as compared to its peers in the private sector. This indicates low customer stickiness in the short term. Further, due to a high mix of non-linked and participating policies, LIC’s margin of 9.9% was lower in FY2011 as compared to 20-25% for private players.

However, the sector outlook is positive as per the note. Life insurance premium for the Indian market has grown at a CAGR of 11% from FY16 to FY21. This is due to factors like expansion in distribution network, launch of various government schemes and financial inclusion drive. According to Crisil Research, overall premiums for life insurers and new business premiums are expected to grow at a CAGR of 14-15% and new business premiums at 17-18% over the five-year period ending FY26.

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