"With the policyholders' discount and with retail discount, the IPO comes at one times embedded value (EV). This is as good as you can get. For the largest insurer in India, the pricing is fantastic. We cannot complain on pricing and if LIC is able to deliver on a lot of business parameters now, there is money to be made here."
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We know the discount for the policyholders is going to be there for the LIC employees as well. It is a 100% OFS. What do you make of the price band, the valuation? At the upper end it is Rs 21,000 crore.
We have all got what we asked for just when the DRHP was filed. The news was it will be between Rs 10 lakh crore and Rs 15 lakh crore, which will be two to three times and that time we were sceptical that if the private sector companies which have really good profit margins are going to trade at two to three times, LIC should be between one to two times. I think with the policyholders' discount and with retail discount, the IPO comes at one times embedded value (EV). This is as good as you can get. For the largest insurer in India, the pricing is fantastic. We cannot complain on pricing and if LIC is able to deliver on a lot of business parameters now, there is money to be made here. That is my opening comment. The pricing is absolutely fine and there is very little to complain about here.
Then the question is 1.1 times embedded value. What happens to the other listed insurance companies as well?
It is all connected to what LIC can do. Firstly, the insurance sector will benefit from the reopening of the Indian economy. Last two years have not been really good for the entire insurance sector – be it a LIC or the private insurance companies because one has to meet people to sell insurance policies. Insurance policy selling is not very easy. One has to meet and convince people and in this pandemic, it was very difficult for the agents to go out and do this. So a good amount of benefit will come to LIC as well as the private insurer companies for the next one year.
These are the plans from where LIC has really stayed away and these are the areas where the private insurer companies are making huge margins and huge money. Once LIC gets listed, all investors are going to question why we are not launching new products which are profitable and which the young Indians want?
If LIC decides to enter new products in a big way, then some competition for the private sector can come in but that is the story for 2023 and not 2022 because LIC is also a giant and it will take time to launch new products to ensure that the agents have enough training. For the next 6 to 12 months, the outlook is good for everyone. Beyond that, it depends on how LIC tries to enter the forte of the private sector companies.
Let us look at profitability, a point which you have raised. For the market share and for the profit which LIC has, if compared with other private players, LIC is lagging. What is so good about LIC then?
In India, we always say that stock price is going to reflect what a company can do in the next 20 years because in India, a growth market, the insurance sector is heavily underpenetrated. We may feel that the LIC profits are low. Why should we even give one time embedded value but we have to realise that it is a brand which people trust. People will never question whether LIC will exist after 15-20 years or not and they have a fantastic distribution network of 13 lakh agents.
So they have a lot of power in terms of brand and distribution. What they really need to do is launch new products and market those new products to the new clients. The profitability of LIC will also change over time if the management and the government want it to change. If we look at the future, all the organisations can change. Let us look at HDFC Life and ICICI Prudential; roughly 75-80% of the valuation today comes from what the company can do in the future and not what the company has done in the past.
So while LIC profitability has been low, if they want to change, they really have the two components going for themselves. One is the brand and the second is the distribution. The only thing they have to work on is launching new products and training the agents to sell those new products and focus on them.
So the one time embedded value is the risk we can take and live with. Maybe two or three years later, we will realise it is okay, this is not working out. But then maybe we will not make a lot of money here. But if it works out, there is definitely money to be made. It is a bet where heads I win and tails I do not lose so much. It just looks like that at this point in time.
There are two categories of investors – one, who want to make LIC as a portfolio stock, bet on India, bet on LIC and the second category is buy LIC either for the pop for next three to six months because if the anchor book gets fully subscribed and oversubscribed, then on would imagine that some large anchor investors would come to buy LIC from the open market abd then a pop will happen. What advice would you give to the latter?
The pricing is so attractive that the answer for both of them would be the same; maybe there is some short term money to be made, especially if you are getting your policyholder discount or the retail investor discount. It is not so easy to lose money. You will lose money only if there is a big correction in the markets and not a reason specific to LIC. It is worth a punt even in the short term and in the long term, the pricing is attractive if they can deliver. There is really good money to be made so even short term investors might actually want to try this because the size has been reduced.
Earlier, we were talking about a Rs 50,000, 60,000-crore IPO. Now, it's a Rs 21,000 crore IPO. So some scarcity can get created and that I think is a play for everyone. For new investors, it is okay to start the journey with this stock because it is something which you will be comfortable with and will not panic if the share price goes up or down. The LIC policyholders remain with LIC for 20 years and so naturally have a long-term outlook. It just seems that long term some money can be made here.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)
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LIC is worth a punt in the short term as well as in the long term: Digant Haria have 1860 words, post on economictimes.indiatimes.com at April 27, 2022. This is cached page on TechNews. If you want remove this page, please contact us.