LIC IPO could be priced in the range of Rs 1,700 to Rs 3,500

Life Insurance Corporation of India (LIC) filed its draft red herring prospectus (DRHP) on Sunday for its mega initial public offering (IPO). As per the DRHP, the government-owned insurer will have up to 31,62,49,885 (31.62 crore) equity shares of the face value of Rs 10 on offer through the offer for sale (OFS), representing 5 per cent of equity stake. There will be no fresh issue of shares. The DRHP also disclosed the LIC's embedded value at Rs 5,39,686 crore as of September 30, 2021.

For life insurers one of the most effective ways of calculation is through Embedded Value (EV) to arrive at their IPO value. The EV is the sum total of the present value of all future profits from existing business plus net worth, which includes capital.

HDFC Life insurance company trades at around 4.72 times its embedded value. It recently also bought Exide Life at a valuation of 2.5 times for Rs 6,687 crore. The other two listed life insurance companies- ICICI Prudential Life and SBI Life- get a market valuation of around 3 times their respective EVs.

Assuming the country’s largest insurer enjoys a similar valuation of 3-4 times then the company’s market capitalisation should be around Rs 16.19 lakh crore to Rs 21.58 lakh crore. If we take the conservative estimate and value it on the lower multiple of 2 and 2.5 times the value comes around Rs 10 to Rs 13 lakh crore.

Now considering that out of the total market cap only 5 per cent will be for IPO totalling 31,62,49,885 shares then the value per share will range from Rs 2,560 to Rs 3,413 for the multiple of 3X and 4X respectively. At the conservative multiple 2X and 2.5X, the value per share comes to Rs 1,706 and Rs 2,133.

The insurer, however, can have a lower multiple on the account of product mix which is largely made of participating policies. In addition, there are fears in the minds of investors that LIC will remain as a lender of last resort for the government. IDBI Bank's bailout is a recent example where LIC had to invest for a majority stake in the bank. DRHP states that it may have to ensure that either IDBI Bank or LIC Housing Finance cease to conduct housing finance activities in order to meet regulatory requirements that housing finance activity shall be conducted only by one entity.

DRHP states that in addition LIC may be required to take certain actions in furtherance of the GoI’s economic or policy objectives. There can be no assurance that such actions would necessarily be beneficial to the corporation. The interests of the promoter as the controlling shareholder of the corporation could be in conflict with the interests of other shareholders

Also read: LIC IPO: Govt's acquisition cost of shares at only Rs 0.16/share

Also read: LIC files DRHP with SEBI for mega IPO; up to 31.62 crore shares on offer