Mumbai: Over 71% of investors in the Rs.5,627 billion anchor segment of Life Insurance Corporation’s IPO were domestic mutual funds. A quarter of the domestic investment came from the SBI Mutual Fund, which subscribed through four programs.
The LIC IPO opens for public subscription on Wednesday and ends on May 9th. The anchor portion is open to institutional investors prior to the retail IPO, and anchor investors must commit to holding the shares. According to market sources, the Rs 21,000-crore IPO, which is the largest in the country, would be fully underwritten given the large number of policyholders the company has.
Shares will be offered to policyholders at a discount of Rs 60. However, many retail investors are cautious as several large IPOs have not maintained their momentum post-listing due to their size. According to analysts, the scope for the company’s shares to appreciate in value would depend on how the surplus is distributed between policyholders and shareholders and the type of products LIC will sell.
In an IPO filing, the company said it had completed the allotment of 5.9 billion shares to anchor investors at their allotment price of Rs 949. Besides SBI, the other largest mutual fund investor was ICICI Prudential, picking up Rs 700 crore worth of shares, and HDFC Mutual Fund with Rs 650 crore. A total of 15 domestic mutual funds invested over Rs 4,000 crore through 99 schemes.
Among foreign investors, the largest subscription came from Singapore government wealth fund GIC, followed by BNP Investments. The moderate participation of foreign investors comes as foreign institutional investors have been net sellers in the stock exchanges this year. Foreign investors have exited emerging markets amid economic uncertainty following the Russian invasion of Ukraine.
Despite the poor performance of foreign investors and the outsized issuance, many brokerage firms recommend the LIC IPO to investors after the government adopted a conservative valuation.
“At the higher end of the price range, the LIC IPO is being offered at an embedded value (EV) price of 1.1x compared to other publicly traded personal life insurance companies such as HDFC Life, ICICI Pru Life and SBI Life, which are trading at multiples of 2 .5-4.3x September 2021 EV. While valuations of LIC appear cheap compared to listed private players, investors need to consider that LIC has a lower Value of New Business (VNB) margin in 9MFY21 (Apr-Dec FY21) compared to private players of 9, 3% has DSO margins of 25-27%,” said Angel One Equity Research Analyst Yash Gupta.
According to Gupta, LIC is valued lower due to its higher proportion of low-margin equity and group insurance products in LIC’s portfolio. “While LIC has concerns about losing market share at individual insurance companies and historically low margins, we believe valuations drive most of the negative factors,” he added. Other factors supporting the issue are expected improvements in product mix and a more significant transfer of surplus to shareholders’ accounts in the coming years, which would push earnings away from currently depressed levels.
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