LIC’s IPO: The ‘Mother of All Listings’ Comes With Big Risks
India’s biggest risk management company is facing a slew of uncertainties with its massive IPO.
"Risk hai toh ishq hai" (where there's a risk, there is attraction) – that is a punchline made famous by actor Prateek Gandhi as he played disgraced stockbroker Harshad Mehta in the web series Scam 1992. Those involved in the of the state-owned behemoth, the Life Insurance Corporation of India (LIC), may not find that funny.
So, let’s do a tongue twister on this – India's biggest risk management company that manages the life risk of policyholders faces the risk of underpricing or overpricing its shares in addition to facing the risk of an inadequate market appetite because of its size, apart from geopolitical and global market risks, in addition to new kinds of risks in risk management.
Take a deep breath and read that again, slowly. Or let me explain.
The Pricing of Shares
With a 66% market share, more than 283 million policies and 1.35 million agents amid 23 competitors, by public sector standards, LIC has done well so far. It even has a mutual fund and a credit card business managed through subsidiaries. But the game is heating up because its accountability will shift from bureaucratic corridors to the stock exchanges.
The pricing of shares is a risky and somewhat subjective business in the best of times, and often resembles a work of modern art whose beauty sometimes depends on how slanting rays of light fall on a painting. Stocks depend on market moods often linked to interest rates, the nature of the industry (sunrise or sunset?), profitability, relative choice (“is this better than the other stock?”) or technology (“can these guys embrace digital disruption?”).
Add all of that together, and you get the LIC issue, which is slated to be India's biggest IPO. But then, this is not a Paytm that can afford to fail on the listing – we have umbilical links of the insurance monopoly to the government of India, which has a double tightrope walk.
If it gets loads of money, it manages to silence critics who say the fiscal deficit is not easy to manage, and also please the World Economic Forum-types who cheer privatisation from the rich environs of the Swiss Alps.
On the other hand, it has to engineer sufficient market appetite because in merely shedding a planned 5 per cent of its stakes, the Government of India plans to rake in about Rs 75,000 crore ($10 billion), ie, Rs 20,000 crore, give or take. Its best bets as buyers are deep-pocket global funds and institutions that have this kind of money, besides mutual funds. These are together expected to contribute 60% of the proceeds as anchor investors. Will they find the price attractive? That is a risk.
Will the Numbers Add Up?
Leaving nothing to chance, LIC is converting its old customers into new shareholders in a model that is turning a threat into an opportunity. The annual bonus that LIC's policyholders typically get from the surplus earned by the company now has to be shared as dividends with newfangled shareholders. What better way than turning loyal customers and employees into retail shareholders? Sounds good, but will the numbers add up? That is a risk. About 15% of the issue is expected to come from this category of investors.
What if the issue bombs (as in under-subscription or a fall in prices on listing – a la Paytm)? Or if there are allegations of underpricing? In that case, Prime Minister Narendra Modi's government has to face the prospect of opposition parties raising this, apart from their usual rant against disinvestment, ie, selling old family jewels of the Nehru era. That is a political risk.
As if all this is not enough, we have the valuation risk. Insurance companies are typically measured on the basis of the capital/surplus they already have, besides a front-loaded estimate of the earnings that its current policy-holders would bring in the future. This is called embedded value. The embedded value a few months ago was Rs 5,39,000 crore.
As this is being written, over how many times the embedded value would (or should) LIC be valued at. Two? Or close to four? This is not a Bollywood song that you can go one-two-ka-four, because the right pricing makes all the difference in getting the anticipated amount of funds. That is yet another risk.
Two more sets of risks to go. Global markets are in a bout of uncertainty as Russia has amassed troops on the Ukraine border in a war mood, even as Wall Street frets on how the US Fed will begin to end its cheap money policy by raising interest rates. Stock market appetites are often determined not by the intrinsic value of a company but by an enzyme called cheap money. LIC is heading into unchartered waters there.
The Long-Term Risk for Investors
Then, there is the long-term risk for investors because LIC is not the kind of share you sell too soon after buying. Apart from the risk of losing market share to competitors or cheesing off policy-holders who get less of its surplus, there are things like climate change. Risk measurement leads to the pricing of insurance policies (premium payments) and insurance companies need to know how to price the risk – that is their core business.
In the age of terrorism and climate change, burdened with new digital technologies that need to be embraced to measure data and risk, LIC has to adopt new techniques and adapt to sweeping changes in technology. Given that it is a public sector company, there is always the challenge of how soon and how well it uses new technologies.
Risk measurement and management are core to LIC's being, but facing up to new risks, be they from stock markets, pandemics or climate change, will keep LIC on its toes in the foreseeable future.
Who knows, with India as an IT power, LIC may even become a global player. Or will it, as a public sector company hanging on to the coattails of the government, be trapped in old-world cocoons?
The answer may be blowing in the wind, though the government can look forward to a revenue windfall this spring.
(The author is a senior journalist and commentator. He can be reached on Twitter @madversity. This is an opinion article and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)
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