Valuing LIC
Business Today|December 13, 2020
HOW THE 64-YEAR-OLD LIFE INSURANCE CORPORATION SHOULD BE VALUED FOR STOCK MARKET LISTING
ANAND ADHIKARI

Chief Economic Advisor K.V. Subramanian recently hinted that the government could mobilise ₹90,000 crore by selling 6-7 per cent stake in Life Insurance Corporation (LIC). This was the first statement by a senior government functionary on the issue after Finance Minister Nirmala Sitharaman announced plans for LIC’s initial public offering (IPO) in her FY21 Budget speech. “I have done some back-of-the-envelope calculations,” he said. This ₹90,000 crore for a 6-7 per cent stake puts LIC’s valuation at ₹12.85-15 lakh crore, making it India’s second most valued company after Reliance Industries (RIL), ahead of marquee names such as HDFC Bank, TCS, Infosys and HUL.

But it’s too early to celebrate. Valuing the 64-year-old company is perhaps the toughest of tasks because of its opaque style of operations. One reason is that it is governed by the LIC Act of 1956 with Insurance Regulatory and Development Authority of India (IRDAI) having very little say in regulating its operations. Then there is the complex product portfolio skewed towards savings than protection (in contrast to other listed life insurers) and a sovereign guarantee backing every policy. There are also concerns about a unique profitsharing arrangement under which policyholders pocket 95 per cent surplus and shareholders (right now, government of India) get 5 per cent. “The entire structure of LIC has to be revisited to make it more investor friendly. If a major part of surpluses goes to policyholders, investors, especially institutional, will be wary of investing,” says Ajay Sharma, Managing Director, Valuation Services (India) at Colliers International. Last, but not the least, a large chunk of LIC’s equity investments comprise PSU shares it was forced to buy over the years to help the Centre meet its disinvestment targets.

Even positives such as brand name and fixed assets such as its prime real estate are tough to value with precision. “The valuation of the corporation will be based on several factors like products, real estate, assets and investments. The totality of all that plus the brand value,” LIC Chairman M.R. Kumar said recently. BT’s request for a meeting with Kumar was pending at the time of going to press.

In spite of these challenges, the process of valuing LIC has begun with the appointment of SBI Capital Markets and Deloitte as advisors for the pre-IPO process.

The How Question

LIC is India’s 2nd-largest financial services institution with ₹31 lakh crore balance sheet, next to the country’s largest bank, State Bank of India (SBI), which has assets of ₹39.51 lakh crore. But there is no comparable company in terms of top line. For example, LIC earned ₹57,958 crore first-year premium and ₹1,20,317 crore single premium in FY20. Renewal premiums were Ì€ 2,01,113 crore. These figures (including investment income) gave it net revenues of ₹6.15 lakh crore. RIL reported ₹3.65 lakh crore revenues in FY20. This shows the enormity of the task before LIC’s valuers.

Then there is the issue of embedded value (EV) that life insurers have to mention in their IPO documents. Insurance is a long-term business where a company receives recurring payments over long periods. One of the most popular ways of valuing such a business is finding out the EV, the sum of present value of all future profits from existing business plus net worth. “LIC does not publish either its EV or value of new business,” says Rajeev R. Shah, Managing Director and CEO of RBSA Advisory, which is into valuation, investment banking and corporate restructuring.

Banking and financial services businesses are valued on the basis of price to book (PB) value while manufacturing and some services businesses are valued on price to earnings (PE) multiples. There is also sub-classification within financial services — percentage of assets under management (AUM) for valuing mutual fund (savings) businesses, EV multiples for insurance (protection) firms and PB for lending businesses (banks and NBFCs).

PB is the key parametre for valuing lending businesses in the stock market. For example, Kotak Mahindra Bank is trading at one of the highest PB values of 5.97 times, which means the market is valuing it at almost six times its book value. SBI, on the other hand, is trading at a PB value of just 0.85.

Once investors get an EV of LIC, the market will put a value over and above it. “It could be one time or five times,” says an insurance expert. ICICI Pru Life is valued at 2.68 times its FY20 EV of ₹23,000 crore. Similarly, HDFC Life is at 6.10 times its FY20 EV of ₹20,650 crore.

THE VALUATION SPOILERS

Major adjustment will be required due to following reasons

LIC is a government company with legacy assets such as people; political interference, too, is an issue

Continue reading your story on the app

Continue reading your story in the magazine

MORE STORIES FROM BUSINESS TODAYView All

Robust Biz Continuity Plan Is Non-negotiable

Banks provide the lifeblood to the financial well-being of different segments. In a crisis, we have to do everything to safeguard their interests

7 mins read
Business Today
February 07, 2021

No Business As Usual; The Game Has Changed

Companies that emerge from this crisis with solid finances, a resilient supply chain, skilled workers and the capacity to analyse data will be well-placed to seize new opportunities

5 mins read
Business Today
February 07, 2021

Moving From Assembly To Manufacturing Base

Lower dependence on imports will lead to greater demand for Make-in-India electronics products and boost employment

5 mins read
Business Today
February 07, 2021

To Find New Ways to Codify and Document How to do Things

A combination of remote monitoring & tele-consultation can foster a more holistic and effective approach to taking care of health issues

5 mins read
Business Today
February 07, 2021

Reinventing Products, Offerings To Cater To Changing Preferences

New culinary experiences and dining options, staycations and gourmet food delivery offer exclusivity

6 mins read
Business Today
February 07, 2021

Must Never Lose Sight Of Risk & Crisis Management

Being prudent, adhering to strong governance practices and focusing on long-term growth are critical

4 mins read
Business Today
February 07, 2021

Future-proofing Business Critical Than Ever

The priority in the new normal will be to create businesses that can withstand unanticipated stress

4 mins read
Business Today
February 07, 2021

Autonomy To Be Established For Quick Decision-making

In the coming future, managements will have to be prepared for all eventualities and uncertainties

4 mins read
Business Today
February 07, 2021

Creating Operating Units For Regional, Local Execution

The shift to becoming more available on e-commerce platforms while revising pricing strategies will be an exciting challenge

4 mins read
Business Today
February 07, 2021

A Greater Sense of Urgency for Reforms

The pandemic has brought a realisation that we need greater public health infrastructure so that we are ready for any calamity of this order in the future

4 mins read
Business Today
February 07, 2021
RELATED STORIES

MAKERS AND SHAKERS

WHY DO SAILING’S MOST SUCCESSFUL INFLUENCERS THINK THE BEST BOAT FOR NOVICE OCEAN CRUISERS IS A PERFORMANCE MULTIHULL? ASKS TOBY HODGES

8 mins read
Yachting World
February 2021

Region To Region

Region To Region

10+ mins read
Musky Hunter
February/March 2021

YOGA & PEACE

DEEPAK CHOPRA speaks with DAAJI about the role Yoga has to play in bringing about world peace. This is an excerpt from their conversation broadcast on International Day of Peace, September 21, 2020. That documentary is available at https://heartfulness.org/en/international-day-of-peace/.

6 mins read
Heartfulness eMagazine
January 2021

Create the habit of meditation

CHIRAG KULKARNI, Co-Founder and CMO of Medly Pharmacies in the USA, speaks with RISHIKA SHARMA about creating a regular meditation practice, so as to make it a habit. He also shares how meditation has benefited both his personal and professional life.

7 mins read
Heartfulness eMagazine
January 2021

SHIA'S PRIVATE TEMPLE OF DOOM!

Indiana Jones gig derailed by abuse scandal

2 mins read
Globe
January 11, 2021

Let's Dish

"Food Raconteur” Ashok Nageshwaran wants to tell you a story.

2 mins read
DesignSTL
January/February 2021

THE MAKING OF A MODEL MINORITY

Indian Americans rarely stop to ask why our entrance into American society has been so rapid—or to consider what we have in common with other nonwhite Americans.

10+ mins read
The Atlantic
January - February 2021

Interconnectedness

In 2017, DR. VANDANA SHIVA spoke with KIM HUGHES about the sacredness of the Earth, the work she has been doing to bring awareness and change in the field of sustainable agriculture, and the importance of understanding our interconnectedness with Nature, and how we can change the way we eat.

8 mins read
Heartfulness eMagazine
December 2020

DIAMONDS - A Luxury Gem Steeped in Fact & Fable

The diamond is one fabled gemstone! For example, google “Hope Diamond” to see all the legends associated with just this one stone said to bring misfortune to its owners.

2 mins read
Rock&Gem Magazine
January 2021

Women's World

Brown Sugaa and Medusa

2 mins read
Born To Ride Southeast Magazine
December 2020