Two years in the making, India’s biggest IPO is finally here

A woman walks past a bus stop with Life Insurance Corporation of India (LIC) advertisement in Mumbai, India, January 31, 2022.
A woman walks past a bus stop with Life Insurance Corporation of India (LIC) advertisement in Mumbai, India, January 31, 2022.
Image: REUTERS/Francis Mascarenhas
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The stage is set for one of India’s crown jewels, Life Insurance Corporation or LIC, to become its biggest listed financial services provider.

On Sunday (Feb. 13), the largest state-run insurer filed its draft red herring prospectus with the markets regulator Sebi for an initial public offer. The government is offering to sell 316 million shares or 5% of the equity to raise up to 65,000 crore rupees ($8.6 billion)—the biggest in the history of Indian capital markets. If that happens, it will surpass the previous record set by digital payments company Paytm, which raised Rs18,300 crore in November 2021.

While the dates for the IPO are not known yet, it is expected to take place by March.

The proceeds are expected to help the government meet its disinvestment target of Rs78,000 crore for the ongoing fiscal year. The target was lowered from last year’s Rs1.75 lakh crore; so far, divestment has earned only Rs12,030 crore till now this year.

The life insurance giant manages more than $500 billion of assets and holds over 60% of India’s life insurance market by premiums. When the IPO is over, the LIC will join the likes of big conglomerates Reliance Industries, TCS, HDFC Bank, and Infosys.

The debate on valuation

LIC’s size and special status pose a unique challenge in valuing the company. Since LIC releases its balance sheet only once a year, peer-to-peer comparisons are tricky.

According to the draft prospectus, LIC has an embedded value (EV) of Rs5.39 lakh crore (5.39 trillion rupees is $71.3 billion) as of Sep. 30, 2021. This is the first time the 65-year old insurer has released its EV, an actuarial measure.

Market analysts Quartz spoke to estimate that the market value of LIC should be closer to Rs11 lakh crore ($150 billion).

The embedded value is a measure of future cash flows in life insurance companies and a key financial gauge for insurers, and the market value globally is typically valued at 2-3 times their EV. However, the valuation premium in India is higher because of the potential for growth, size of the Indian market, and relatively under penetration of insurance in India.

By that calculation, the life insurer’s market capitalisation could be nearly Rs19 lakh crore.

“Based on press reports, the government is expecting a valuation of Rs10-15 trillion. At the lower end, LIC’s valuation could be 40%-50% of private listed entities while at the upper end, the valuation for LIC could be at a 10%-20% discount to private sector players,” Macquarie Capital Securities analyst Suresh Ganapathy said in a note last week.

Currently, there are three listed life insurers in India: HDFC Life, ICICI Prudential, and SBI Life. In comparison, HDFC Life has a market valuation of Rs1.25 lakh crore, more than four times its Rs30,000 crore EV.

Analysts do not expect LIC to be valued like the private insurer HDFC Life due to its state ownership. A further discount in valuation could be expected as government-owned entities have issues like public welfare objectives and slower decision-making. News reports suggest that if the market discounts LIC’s multiple to two-three times, the life insurer could be valued between Rs12.4 lakh crore and Rs 16.2 lakh crore.