By Abhishek Katti
When Was The IPO announced ?
During the budget speech, which was addressed by the Honorable Minister of Finance Nirmala Sitharaman, the Life Insurance Corporation of India Limited was highlighted under the context of strategic disinvestment. On the 1st of February 2020, while the speech was being delivered, it was conveyed in the lower house that listing of a company on the stock market brings discipline in the operations of that particular company along with added advantage to retail investors. LIC has been always consistent with its performance in the insurance industry and with its name about to be displayed on the stock market, expectations have reached new heights.
This article gives you a short take on the LIC IPO and gives you a step by step understanding of the insurance set up in India.
Performance Of The Insurance Sector
The year 2021 is considered as a period where investors are optimistic as the stock market is on a spectacular bull run. When it comes to the insurance industry HDFC Life Insurance and SBI Life Insurance have been listed on the NIFTY 50 index. To understand the importance of being listed on the NIFTY 50 index, it is important to understand what the term actually means.
When we want to find out about the performance of our economy, we would need to have a look at the performance of the top 50 companies. This basket of 50 companies are selected on the basis of criteria such as prices of the share, revenue and profit after tax. The weighted average of these 50 companies is then listed on the National Stock Exchange (NSE). Another index which is commonly heard of is the BSE SENSEX.
Moving on to give you a short take on the LIC IPO, this has been estimated to be an amazing opportunity for retail investors as it holds 69% of the market share. The insurance industry consists of one of the two most important yardsticks to measure the performance namely insurance density and Insurance Penetration. While the former is expressed as the premium per capita, the later measures premium as a percentage of GDP. The life insurance density had gone up from 9.1 USD in 2001 to 55.7 USD in 2010 according to the 63rd Annual report of the LIC. The insurance density did moderate thereafter only until 2013. It was later on observed that the parameter reached 55 USD in 2018.
As we can observe in the chart, the penetration in the year 2018 is merely 2.74% of GDP. An under penetrated industry throws light upon the fact that there is tremendous scope for improvement and growth. The driving forces of the insurance industry is the young population, the growing of the working age group, increasing awareness about the insurance, Government’s sustained efforts towards 40 crore Jan Dhan accounts and the beneficiaries of which are covered under some form of insurance.
What Is In It For Investors ?
After analysis of the insurance industry in India, we shall now throw light on what LIC has to offer. With a presence in every corner , LIC has 8 zonal offices, 113 divisional offices, 2048 branches and more than 12 lakh agents. The corporation has a prime focus on women empowerment and has mentioned it in its annual reports. The premium collection through various channels till 31st of March 2020 has been estimated to be approximately INR 1,88,000 crores while the total number of policy holders are 39,13,46,350. LIC is considered to be the biggest institutional investor in India. The organisation has incurred a profit of approximately INR 23,000 crores. Apart from the profits earned through equity, LIC has its Profits after Tax (PAT) as more than INR 2000 crores. The IPO has also kept 10% of its total offerings reserved for its customers or policy holders. LIC India Limited has a satisfactory amount of global presence with its operations in almost 14 countries including United Kingdom, Fiji and Mauritius.
Now that we understand how an investor would benefit, a short take on the LIC IPO would be incomplete without factoring the role that SEBI has to play.
What Role Does SEBI Play On A Short Take On The LIC IPO ?
Recently, it was reported that the Securities and Exchange Board of India has eased certain norms for a smooth listing of the corporation on the stock market. According to The Indian Express, a conservative estimate of the corporation amounts to Rs 10 Lakh crore which could go up to Rs 15 Lakh crore. The company will have to offer 10% stake in the form of shares along with an additional 5% of the incremental amount after INR 1 Lakh crore. In other words, for a market capitalization of Rs 10 Lakh crore, the company will have to offer INR 55,000 crores worth of shares ( 10% of 1 lakh crore plus 5% of 9 lakh crores). The IPO is expected to be listed in the third quarter of the new financial year as of February 2021. Previously, the regulatory body had dictated that companies with post issue market capital of INR 4000 crores or more are required to offer at least 10% of the capital to the public in the IPO which is also known as Minimum Public Offerings (MPO). It further stated that the company should achieve at least 25% of Minimum Public shareholding (MPS) within three years of its listing.
If we observe the chart above, it can be seen that LIC has seen an asset base rise 9.1% to 31.1 Lakh crore as on March 31st, 2019. This is despite the fact that the total premium income has grown by INR 0.2 Lakh crore from 3.2 to 3.4 depicted by the blue line. This reflects the quality of the asset management by the policy makers at LIC. This positive trend is perhaps attributed to the presence of an offset between payouts in the form of cancellations, maturity or death benefits.
A Short Take on the LIC IPO – Concluding Remarks
While it is important to understand the performance of the company, it should be understood that listing leads to greater expectations. An IPO has to face tougher competition and volatility as an effect of uncertain events such the ongoing pandemic on the market price. This can drastically bring down the valuation of the company.
For instance, the shares of New Delhi Assurance IPO were offered in the range of INR 770-800 and the shares today are being traded at INR 164. The IPO for General Insurance corporation offered its shares at a rate of INR 912 but the shares today cost INR 170. From the details mentioned above, it ought to be kept in mind that the details and trends mentioned does not mean that investing in the corporation would benefit its retail investors a 100%.
Therefore, having faith and knowledge on the performance of an IPO is important but completely relying upon the performance of the firm even during the times of high uncertainty is highly risky.
Secondly, it should be noted that investments in an IPO should be done from a long term perspective as there are frequent rise and falls in the share prices in the immediate short term. If we were to look at a long term perspective, the cumulative curve has a chance of experiencing an upward slope.
This article is authored by Abhishek Katti. He is a graduate of technology from NIT Allahabad. He writes about topics such as economy, financial planning, investments and wealth management.
Read about another interesting topic – 5 Things To Know While Applying For An IPO.