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
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