The Stunning Scale of India’s Biggest IPO Ever
(Bloomberg) -- State-owned Life Insurance Corp. of India, with its distinctive blue and yellow logo, is ubiquitous across Asia’s third-largest economy. LIC controls two-thirds of the Indian market with almost 300 million policies and more than 1.2 million agents, 100,000 employees, 2,000 branches and 1,500 satellite offices. After a one-year delay, Prime Minister Narendra Modi’s administration is racing to sell a stake of 5% to 10% in LIC in what would be India’s biggest-ever initial public offering. A 10% stake would be the second-biggest IPO ever in the global insurance industry. One big hurdle ahead is assigning a value to a company with such a towering presence over India’s financial landscape.
1. Why is the government selling a stake?
The IPO is the biggest chunk of the government’s plan to raise 1.75 trillion rupees ($24 billion) by selling assets. The money would be used to narrow India’s budget deficit, which is forecast to be 6.8% this year. The government plan includes offering majority stakes in four other state-run firms -- Air India, Bharat Petroleum Corp., Shipping Corp. of India and Container Corp. of India.
2. When is the IPO?
The government is aiming for sometime in the first three months of 2022. The IPO was initially planned for the fiscal year beginning April 1, 2020, but was delayed as India’s harsh stay-at-home rules during the pandemic interrupted the pace of IPO work.
3. Why is valuing the company so difficult?
Mumbai-headquartered LIC holds $511 billion of assets, equivalent to the total size of the country’s mutual fund industry. Milliman and Ernst & Young, the firms appointed to work on the valuation, will need to sift through millions of policies to account for parameters including mortalities, morbidities, lapses and surrenders. They will also need to weigh the value of LIC’s fixed property across its 2,000 branches. LIC releases its balance sheet only once a year, and there is no detailed number publicly available to arrive at its embedded value, the key financial gauge for insurers, which combines the current value of future profits with the net value of assets. Peer-to-peer comparisons are also tricky. LIC is governed by a distinct 1956 parliamentary act rather than the law that governs the nation’s other insurance firms. LIC enjoys a sovereign guarantee of its policies, giving it a unique selling point and allowing it to operate with a thinner capital base than its competitors.
4. What could LIC’s value be?
The government is seeking a valuation of as much as 8 trillion to 10 trillion rupees ($135 billion). At that level, the sale of even a 5% stake would make it India’s biggest-ever IPO and a 10% dilution would make it the second-biggest involving an insurer anywhere in the world. Analysts at Jefferies India have said LIC’s valuation could be as high as 19 trillion rupees. Other estimates, including one from RBSA Advisors, put the value in the range of 10 trillion to 11.6 trillion rupees.
5. Why does this IPO matter?
Sales of stakes in companies so deeply entrenched in the history of their nations aren’t an everyday occurrence. LIC has exerted a towering presence over India’s financial landscape since Jawaharlal Nehru’s government combined the country’s 245 insurance companies and provident fund societies in 1956 with a mandate to offer life insurance to all sections of society. For many Indians, insurance is still synonymous with the company, even after the industry opened up to private firms two decades ago. Over the years, it has been deployed as the investor of last resort by governments of the day to support markets and bail out other state-run companies, as in 2019 with IDBI Bank Ltd. Using policyholder money to rescue state-owned firms would probably become a thing of the past if LIC becomes a publicly listed company.
6. Are there parallels in other nations?
Japan Post, whose privatization started in 2015, was Japan’s biggest holder of bank deposits and its largest insurer while it ran the national postal service. Like LIC, it was highly visible, with the biggest chain of storefronts in Japan and a fleet of 86,000 motorbikes for mail delivery. Oil giant Saudi Aramco, which staged the world’s biggest IPO in 2019, was likewise a symbol of Saudi Arabia’s economic might, generating almost 90% of the Saudi government’s income.
7. Will investors go for it?
While the sheer size of the offering could crowd out smaller listings and dent secondary market appetite, the massive amount of liquidity currently kicking around in global financial markets could help the IPO sail through. Companies have raised about $10.2 billion through IPOs in India so far this year, putting 2021 on track to beat the all-time record of $11.8 billion.
The Reference Shelf
- India was said to be considering allowing foreign direct investment in LIC.
- A leading trade union says the IPO could result in job losses and reduce funding of infrastructure projects.
- QuickTake explainers on Saudi Aramco’s record IPO and Japan Post.
- The LIC website has a history of the company, and of insurance, along with its annual report.
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