IPO List: LIC’s weak start upsets retail investors

Life Insurance Corporation (LIC) saw a weak start on the stock exchange on Tuesday, listing its shares at a discount of more than 8% off the issue price. The script closed at Rs 875.45 per share on the BSE, down Rs 73.55 or 7.8%. There was some protection for policyholders and retail investors who were allotted shares at Rs 889 and Rs 904, respectively, thanks to the discount offered by the insurer. The state-owned insurance behemoth’s repressed list could be attributed to crippled market conditions, institutional brokerage and mixed opinions from investors and the collapse of life insurance stock valuations.

Hold the LIC
Experts, however, suggest that investors in LIC should retain their investment with a long-term outlook as the company is a family name with an influential market share and loyal policy base. “There is still strong confidence in the brand, and so, it could be a good investment bet because LIC’s track record and reach are well-known,” said Harshad Chetanwala, co-founder of MyWealthGrowth.com.

While this may be true, analysts point out that following the recent restructuring, insurers are seeking to increase their share of non-participating net protection products to only 5-6% of today’s product portfolio. However, selling high-margin non-par products requires a change of mindset among LIC agents.

While the business may be a strong one with stability in the operating metrics and the potential to grow from a less penetrated life insurance market, there are volatility in embedded value (EV) that should be considered for a significant portion of the EV mark-to-structure. Unrealistic equity gains in the market.

Again, LIC is losing market share in the private sector with an annual premium equivalent (APE) growth of only 6-7% over the last five years, compared to about 14% for private sector players. Experts have set a target price of around Rs 1,000 for the stock. So investors should wait for the price to be right. Analysts point out that the ticket size for LIC refers to one-fifth of the private sector, the target segment, and it may be difficult to sell non-par savings products in smaller ticket-sized segments.

Joyce Vanushali, vice president of research at IIFL Securities Ltd., told Bloomberg that LIC’s stock is “a good portfolio hedge against volatility”, but that if the government decides to further reduce its stake in LIC, it could be headed in the medium term. He added that “3% -4% regular dividend can be a sweet that will help keep shareholders.”

A long term business
Life insurance penetration (premium as a% of GDP) and density (premium per capita US $) in India are 3.2% and $ 59, respectively, lower than the global average of 3.3% and $ 360. Dhabal Kapadia, Director, Investment Advisory, Morningstar Investment Advisors (India), says penetration and concentration will increase as per capita income increases. “Life insurance stocks need to be seen as a long-term game,” he says.

Bridges Damodaran, managing partner of Belvedere Associates LLP, says retail investors need to consider investing in life insurer stocks based on their asset allocation strategies and risk appetite.