The mega initial public offering (IPO) of Life Insurance Corporation (LIC) is coming when markets are volatile and foreign portfolio investors (FPIs) are pulling out from Indian stocks in the wake of the US Fed tightening rates. Post-listing, the insurer will be among the top three most-valued stocks in India after Reliance Industries and Tata Consultancy Services. The Indian government plans to divest 5 per cent equity for Rs 65,000 crore ($8.7 billion) in the insurance behemoth Life Insurance Corporation.
LIC IPO: India’s Aramco Moment
Anticipation is high for LIC’s listing. Some bankers have called the IPO India’s Aramco moment, referring to the Gulf oil giant’s $29.4 billion listing in 2019 — the world’s largest. But preparing the sale of a 65-year-old insurer regularly pressed into service to rescue banks and floundering state assets has been halting from the start.
There is another way of looking at how big LIC is by taking its overall assets under management (AUM) into account. As of September 30, this stood at Rs 39.6 trillion. The total AUM of mutual funds operating in India stood at Rs 36.7 trillion. Hence, as of September 30, LIC was bigger than the entire Indian mutual fund industry put together.
Further, LIC has around Rs 9.8 trillion invested in stocks. Interestingly, LIC’s investments in stocks formed around 4 per cent of the market capitalization of the National Stock Exchange as of September 30.
When it comes to stocks, the total AUM of Indian mutual funds stood at Rs 12.8 trillion, which is higher than the amount of money that LIC has invested in stocks. Nonetheless, the stocks portfolio of LIC is more than three-fourths the size of the entire Indian mutual fund industry’s investments in stocks.
LIC IPO: Headwinds May Dampen Listing
Some reports suggest that this might not be the best time to bring in the IPO. The success of LIC IPO would be dependent upon the performance of the capital market. The Indian equity market touched new heights in 2021, and was the top performer among global peers due to favourable macroeconomic conditions, strong corporate earnings, and inflows from retail investors.
According to an HSBC report, FII flows will go back to China from India in 2022, compared to 2021 when money flowed from China to India. On February 14, the stock market witnessed its biggest single-day fall in the last 10 months. The equity market crashed 3 per cent amid the escalating tension between Russia and Ukraine, which has put oil prices on the boil. And, the markets have been choppy ever since.
LIC IPO: Impact on Other Insurance Stocks
“The IPO will continue to drag on LIC’s competitors as investors are trimming their holdings in the three listed private life insurers to make room for the state-owned insurance player. Historically, market leaders are the first ones that list. This is a rare moment when a large player is being listed very late. For any fund manager, having a player that owns over 60 per cent of the market share instead of individually owning those that have 10 per cent-11 per cent market share is a very natural aspiration,” Vidya Bala, co-founder of Primelnvestor, a stocks and mutual funds research firm told Reuters.
UBS Securities expects the listing of LIC to have positive externalities for the life insurance industry as it might lead to a higher awareness that will benefit private companies as well. That said, the brokerage firm does not expect LIC to improve the share of protection products in its product mix anytime soon given its ethos on being a savings instrument for Indians.
“We believe the potential issue could bring transparency to LIC’s operations and increase rationality in its business decisions,” UBS Securities said.
LIC IPO: Impact on Markets
Ventura Securities in its note said: “You see, Covid-19 was a stress test for Indian life insurance companies. Given their steady performance even during such a tricky phase, they are likely to be on a firm growth path going forward. And LIC being the market leader stands the best chance to capture the future growth opportunities.”
LIC IPO will Squeeze out Liquidity from Markets
However, analysts have mixed opinions on the fact that the LIC IPO will squeeze out liquidity from the equity markets. The large issue would have an impact on the liquidity in the secondary market, they say.
“There is adequate liquidity in the market currently,” Ajit Mishra, VP Research Religare Broking said. However, he did not discard the possibility of short-term impact following the continued selling pressure from FIIs which has kept the participants on their toes.
From the previous experiences, others believe that big issues squeeze liquidity for a moment and impact equity flow for a short period, which jitters the sentiments for secondary markets too.
Piyush Nagda, Head – Investment Products, Prabhudas Lilladher said that the mega issues affect liquidity in secondary markets as investors rotate the funds from secondary to the primary market.
“LIC, being the largest ever IPO in Indian history, is bound to suck the liquidity from markets,” he added.
LIC IPO: For Retail Investors
Vinod Nair, Head of Research at Geojit Financial Services, said: “Generally, the appetite for LIC IPO will be high from common & new investors given its mammoth public brand value. However, in the long-term, the end demand and performance will depend on its future growth, profitability, and sustenance of market share in the life insurance industry. While in the short-term, the valuation demanded by the government and discount provided to retail investors will define the success & performance of the offer. We can presume a high demand or vice versa depending on the valuation demanded by the government on LIC’s embedded value is at discount or premium to the insurance industry average.”