First impressions: Upcoming IPO of LIC

On the 1st February of the year, Govt released the budget for the year 2020 including various points and some new things to kick start. One of the major news was about the disinvestment of the LIFE INSURANCE CORPORATION. The government has decided to give an Initial Public Offering for his stake of some of its holdings. LIC was established in 1956 which is fully owned by the Govt. of India. “Listing on the stock exchanges disciplines the company, provides access to financial markets and unlocks value,” Finance Minister Nirmala Sitharaman said in her Budget 2020 speech. “It also gives an opportunity for retail investors to take part in the wealth so created.”

LIC has total assets and costs is around 36 lakh crores. This IPO plays a major role in Finance of India for this. After the COVID-19 situation, this becomes the most important yet vulnerable in equity market case. Govt has some more divesting plans including the BPCL and Air India in the 2nd half of FY 2020-21. However both are running sluggish but LIC expected to list soon. Govt. has set some targets and hopes from this move in future financial years which are following:

  • Disinvestment Target – Rs 2.1 lakh crores.
  • Expected IPO size of around 1 to 1.2 lakh crores for LIC.
  • IPO size of approx. 20k-25k crores for Air India.
  • Estimated IPO size of 50k-60k crores for BPCL.
  • Test of Indian share market’s depth.

Market depth will be stake for test because usually market crashes after some big IPO comes. Asset monetization is the big factor for reviving the economy after some crisis times. Latest fall in market was when SBI Card IPO was offered and hence market attracted towards it and rest of market saw a big down.

As year 2020 has seen a low phase of century in all terms like economy, socialites and life threat due to COVID-19. People are very cautious about their money and they are taking each step only after they are double sure, and they feel necessity to do so. Market has surge and it is not getting levelled in coming months.  A report suggests that economy has fall about odd 20% which will take a year or two to resurface. Looking at situation the only place people are hoping is for their insurance and other covers. Which is good sign for LIC and also for market and economy. Public is caring for their health crisis and hence it may result in good for LIC if it works well.

First year business of LIC before IPO is around 75.9% of market share. (we have not considered the first quarter as its not confirmed and also it is full of disruptions). It has registered the growth of 25% in this year. While Policies wise, it has share percent of 68.7%. However private companies also saw a growth rate of nearly 10% which is little better than their previous performances. LIC has total of 1.2lakh employees including its agents. This factor plays an important role for their brand value and reach to each people in India.

Unlike other finance options, Insurance and other schemes has seen a growth over the COVID-19 period as peoples are scared about their money. They are not willing to invest in other things like equity, debt bonds and commodity. They are looking for an option for future which can return money with a little but sure profit. They also want security for various reasons including any sudden emergency and problems. LIC while has some brilliant figures in terms of returns and claim settlement overall. LIC has more than 99% ratio of successful claim settlements. LIC has become the brand over the years. In the backward areas like village which have not grown as fast as cities, they feel LIC as the only Insurance provider. Infect they will misinterpret you if you say take some insurance. They will feel you are saying to buy LIC, such is the depth of trust in PAN India.

LIC is so successful that it has nearly 1lakh crore of unclaimed settlements in total. This is the amount which has not ever been claimed. This says all about their service and value. Total Asset Under Management is around RS 31lakh crores. LIC has revenue of Rs. 3.37 lakh crores and their net Income is 30,000 crores. While other private companies have total revenue of 1000 crores to 2000 crores. Media discussions estimates the market cap of Rs 10 to 12 lakh crores. Embedded value of LIC focuses on net profit growth a company has to offer his share holders in future. While the LIC has structure to offer 95% of his earning as bonus to their policy holders and employees, while remaining 5% goes to the government of India. This structure is quite old and not preferable as per the guidelines of SEBI. It has to be changed to get Under the equity market and SEBI.

LIC is a very big company on paper which is now preparing to appear for public. It is expected to come as a bang, but somewhere down the line company has lost its market hold over the years. It has reduced to 70% from 90% in last two decades. Which is something to ponder on. This will play a big role for shareholders, if they are thinking to go long term with the LIC. Also, an investor should dive deep into such aspects before taking a stake in LIC. The reason to check for such reason is that company is earning profits, but it has not yielding any growth. But due to increasing inflation shareholder needs that extra edge to compete with price hike in future.

Insurance sector contributes almost the 3.7 % of total GDP of India. While this ratio raises to 6.5% of total GDP of World. This shows the actual path it has still to cover to stay at normal scale of worldwide. Insurance sector has natural growth of 10-11% per annum. Total Asset Under Management is around 40 lakh crores and due to this natural growth, equity of insurance companies is increasing with a boom. The growth which company will do as their extra amount of good work and better performance will add ap the total effect in market and their market cap to grow faster. That’s why shares are enjoying such good run and investors are taking benefits of these parts quite well. Thing to watch out now is how other market players of insurance will sustain when LIC IPO gets introduced. That will tell the story of market in future whether we are balanced enough or we are still vulnerable on market stands.