NEW DELHI: The pricing of Life Insurance Corporation’s IPO could prove to be a tricky affair for the government, which is hoping for a windfall by divesting a 5% stake in the state-owned insurance company.
Analysts say that if the IPO is priced at 2.5-3 times the embedded value, the IPO would be priced at around Rs 1,800-2,250, making its valuation too expensive.
A fund manager at a top MF house told TNIE that even Rs 2,000 is an impossible valuation for the IPO to get. He, however, refused to stick his neck out and quote the ideal price for the IPO at which it would look attractive. When asked if his fund house would be vying for the portion reserved for anchor investors, he said it all depends on the pricing of the issue.
The embedded value of LIC has been estimated at Rs 5.4 lakh crore. Insurance companies already listed on the bourses – SBI Life, HDFC Life and ICICI Prudential Life – command a valuation of 3-4 times the embedded value. If LIC prices its IPO at similar valuations, the IPO would be priced at least Rs 2,200, which analyst say is too high even by LIC’s standards.
The fund manager quoted earlier said that LIC might have to relook at its embedded value. “If you look at return ratios of LIC, they are at sub-par,” says another analyst. LIC in its draft IPO paper says its average three-year Return on Equity (RoE) is 290% compared to SBI Life’s 17%, HDFC Life’s 21% and ICICI Pru Life’s 14.4%. In 2020-21, its EPS was Rs 4.59 compared to SBI Life’s Rs 14.5 and Rs 6.7 each for HDFC Life and ICICI Pru Life.
At Rs 2,000-2,200, LIC IPO would be valued at over 400 times its EPS. SBI life is trading at 82 times its FY21 earnings, HDFC Life 110 times and ICICI Pru Life at 117 times. Former LIC veteran and an ex-IRDAI member Nilesh Sathe, argues that the price to earnings ratio may not be the best metrics to judge the valuation of an insurance company. “In other companies all profit belongs to shareholders, but in case of insurance companies, shareholders get only 5-10% of the profit and the rest goes to policyholders,” he argues.