Is there really appetite?

That is the big question, markets will be asking. It is OK to say that LIC is India’s largest life insurer with over 70% share of the market. But, what we have seen in the last few weeks is a total stay-off approach towards IPOs. The real million dollar question is whether it would be possible to push through an issue of this size an importance when the retail and HNI buying interest is not robust. That has been the indication in recent issues.

Fed policy is an overhang

One of the concerns that will be top of the mind in government circles is that the LIC IPO is likely to coincide with the March Fed policy. Now, March is when the Fed is expected to start off the rate hikes with a possible front-ending of 50 bps in the first phase. As we have seen on earlier occasions, the first rate hike by the Fed after a long gap tends to engender a lot of volatility in equities and other markets across the world. It remains to be seen, how willing QIBs would be, to commit funds in uncertain times. It is going to be very difficult for LIC to avoid the overhang of Fed action, especially considering that it is likely to have a big impact on India FPI flows.

Are valuations steep for LIC?

The valuations may look justified if you look at size, but not if you look at profit. The entire mega valuation was based on the embedded value (EV), which itself was tweaked 6X in 6 months by just reclassifying the shareholder funds. If you compare LIC with SBI Life, the net profits of LIC are twice that of SBI Life but market cap sought is over 10 times. More so, considering that LIC’s VONB per share is just one-fourth of SBI Life and total cost ratio is twice. LIC’s AUM and premium income are substantially higher, but the same cannot be said on the profitability of LIC. Then there is the huge contingent liability of Rs.72,000 crore pertaining to disputed taxes, and that can effectively wipe out the surplus of LIC many times over. Clearly, LIC’s valuations do raise uneasy questions.

How to get the issue through?

With all its might and reach, putting the LIC IPO through may not be simple. There is already a lot of skepticism on IPO pricing in the current context. Also, the last 2 state insurance IPOs of GIC Re and New India Assurance have been virtual disasters for investors. What will eventually come to the rescue of the IPO is the 10% discount offered. Also, the vast army of policyholders and feet on street agents will eventually ensure that the IPO sails through. However, it would be naïve to expect great post-IPO returns. Investors must be cautious!