Is it true that post the revision in size and valuation, the LIC IPO is now cheaper than its peer group in life insurance?

The new thinking in the market is that the LIC IPO is now actually much cheaper than its local and global peers in life insurance. The value of an insurance company is not done based on P/E ratio but on the basis of the ratio of the market capitalization of the insurer to its embedded value or actuarial value. That is where LIC, post its valuation revision, is starting to look attractive. A quick take on the LIC IPO stack.

LIC IPO will open on 04th May and close on 09th of May with price band fixed between Rs.902 and Rs.949 per share. There will be discount for the retail and policyholders. LIC will sell a total of 2,213.75 lakh equity shares representing about 3.5% of total capital base. That will be the OFS dilution in LIC by the government which post issue hold 96.5% in LIC. At this valuation, LIC IPO size will be around Rs.21,008 crore.

How does it compare domestically. By selling 3.5%, the indicative value of LIC is Rs.600,228 crore against embedded value of Rs.539,686 crore. That means Price/Embedded Value ratio of 1.11 times. That scores over HDFC Life Insurance and SBI Life Insurance currently trading at 4.05 times and 3.10 times their embedded values. ICICI Pru Life is also currently trading at 2.5 times its embedded value. That makes LIC cheaper vis-à-vis local peers.

What about global peers? If you leave out the two Chinese insurance companies viz. China Life and Ping An Insurance, LIC is cheaper than most global peers and at par with AXA. There are enough doubts raised about the Chinese accounting standards and levels of accounting transparency, but we will not get into that. The moral of the story is that even globally, LIC looks like a very reasonable bet for the Indian investors.

There is a lot of toning down of valuation that has happened in LIC. Originally, it was closer to $200 billion but subsequently toned down to $150 billion post the actuarial valuation. Now it has been further halved to $78 billion based on roadshow feedback. LIC has 25 crore policyholders and a network of 14 lakh agents. Above all, LIC is also extremely fleet footed, when it comes to the more complex aspects like adapting to digital shifts.

Talking of valuations, one cannot overlook the ROE factor. LIC may be globally the fifth most valuable insurer and in the top-10 in India, but there is more to it. The one fact that takes the cake for LIC is its incredible ROE of 82%. Other insurers don’t even match it by a fraction. That also partially justifies the three-figure P/E ratio of LIC, which does not sound entirely unreasonable if you look at the healthy ROE number of LIC.