By Narendra Solanki
With suspense over India’s largest IPO lastly getting over final month with the announcement of ultimate IPO dates and valuations by the India’s largest and oldest life insurer LIC the speculations and markets buzz round measurement, valuation have lastly come to an in depth. Having mentioned that, the LIC IPO which is priced at Rs 902 – 949 per share (excluding low cost) with OFS of three.5% by the GoI demanding the valuations of about Rs 6 lakh crore for LIC.
The valuations at which the LIC IPO has been introduced is properly beneath the sooner market expectations of about Rs 11-14 lakh crore valuing the corporate between 2x to 3x its embedded worth. This sharp minimize in valuation has shocked in addition to supplied some aid to the markets over the concerns of liquidity squeeze which such an enormous IPO might create throughout present dampened market sentiments resulting from world disaster and impending U.S. Fed charge hike occasion and likewise appeal to investor demand with engaging valuations.
Having mentioned that, allow us to look deeper and perceive the LIC’s valuation conundrum and see the place it stands. To begin with we first have to know the life insurance coverage trade enterprise and its key drivers and ratios. The Indian life insurance coverage trade had just one participant – LIC – throughout CY 1956 to CY 2000. However, post-privatisation in CY 2000, non-public gamers began getting into the trade and by 2000-01, 4 non-public gamers had arrange operations. As on March 31, 2021 there are 23 gamers within the Indian life insurance coverage trade. The complete premium acquired grew at a cagr of 10.5% from FY-07 until FY-21.
The widest used valuation a number of for valuing insurance coverage firms is Market Capitalisation to Embedded Value ratio. The LIC IPO is valued at 1.1x its EV of ~Rs 5,400 billion whereas listed friends are buying and selling with EV multiples of between 2x to 4x. Though Embedded Value is without doubt one of the most essential components however there are additionally some components which can be integrated in multiples at which an organization trades.
Coming to the enterprise mannequin, the insurance coverage firms have primarily three product classes specifically Participating merchandise (insurer invests the premiums acquired in a pooled taking part fund to pay for sure mounted advantages in addition to to share the excess within the type of bonus as a discretionary profit to policyholders), Non-participating merchandise (present a hard and fast quantity of advantages on contingent occasions lined below the product. The policyholders don’t take part in earnings or losses.) and Unit-Linked merchandise (immediately linked to adjustments within the underlying funding, so the funding threat and reward is immediately attributable to the policyholder). Each life insurance coverage firm has a distinct mixture of merchandise in every class and every class has its personal profitability. For instance on an trade large foundation non-participating merchandise have higher profitability margins for shareholders than the opposite two.
On distribution channel entrance, the trade has primarily three giant channels out of many specifically Agents, Bancassurance and Direct. In phrases of low value of acquisition the Direct channel is least value intensive whereas the Agents channel is highest value intensive for firms. Historically LIC has about 96% of its merchandise sourced by brokers whereas non-public insurers supply majority of its merchandise by means of Bancassurance channel (53%) and Direct channel (~16%).
Now, coming to the financials the important thing matrices for the life insurance coverage firms are New enterprise premium (NBP), Value of New Business margin (VNB Margin), Persistency ratio, Solvency ratio & Conservation ratio. NBP signifies the expansion in insurance coverage enterprise when it comes to new insurance policies being offered excluding renewal premium, the VNB margin signifies how a lot revenue an organization is anticipated to make from new enterprise generated in future. The persistency ratio signifies the sustainability of renewal premium an organization receives over time, Solvency ratio is corporate’s measurement of capital in relation with dangers it has underwritten and Conservation ratio represents the entire renewal premium collected within the present yr, expressed as a proportion of complete premium collected within the earlier yr. For LIC the NBP progress has been decrease than non-public friends however has seen enhancements these days whereas NBP margins stays lowest at 9.9% whereas giant trade friends stood round 23%-25% largely resulting from greater share of non-participating insurance policies. In phrases of persistency LIC is essentially according to the trade pattern with higher matrix in 60 plus month matrix. In solvency phrases LIC has considerably improved its solvency ratios from earlier years and is at par with trade requirements.
Now coming to the dimensions, LIC is the most important firm in India with ~64% market share in gross written premium, has over 55% share of the trade agent pool and has highest agent productiveness in trade. LIC’s agent pool is greater than twice that of your entire non-public insurance coverage pool. LIC garners about 10% of complete family financial savings in India and has greater premium flows than India’s largest Bank SBI’s deposit flows.
To sum it up, the corporate’s present valuation appears to have priced in some drag resulting from its legacy and taking part heavy enterprise and better value of operations which has lowered the Embedded multiples however it additionally has lot of things that are turning optimistic for the corporate like rising share of non-participating insurance policies these days, enhancing VNB margins, change in distribution coverage to shareholders at par with non-public insurers and sheer measurement of the corporate which might show to be extra useful than a hindrance. Hence we consider there’s extra left on the desk so far as valuations are involved in LIC IPO.
(Narendra Solanki – Head- Equity Research (Fundamental), Anand Rathi Shares & Stock Brokers. Views expressed are the creator’s personal.)
Source: www.financialexpress.com”