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Whether you are a LIC policyholder or a retail investor, it’s likely that you might have already applied for the LIC IPO—India’s largest ever so far.  But those who burned their fingers in large IPOs, floated near the market tops, are in a dilemma—to subscribe or not to subscribe: that is a question.

If you share this feeling, this article is exclusively for you.

First of all, is there any historical evidence that suggests large IPOs always fail?

While many experts and prolific writers/speakers in the media might want to talk about Reliance Power and Coal India; well, we believe these are apple to orange comparisons.

When Reliance Power IPO flopped, anything suffixed ‘power’ was a craze amongst investors. Valuations were almost irrelevant and mostly justified by the future earnings.

By the way, Reliance Power IPO garnered Rs 11,500 crore back in 2008. If you assume an average inflation of 6% between then and now, LIC IPO should collect at least Rs 26,000 crore to be the largest issue ever, on an inflation-adjusted basis.

And Coal India, more than anything else, has been a casualty of ESG investing. It wasn’t a bad business per se.

Now let’s shift focus to the recent instances.

We observed a pattern amongst 80 companies that went public and collected Rs 1.4 lakh crore in the last two financial years. It means the average issue size has been roughly Rs 1,750 crore. As against that LIC IPO is expected to mop up Rs 21,000 crore from the primary markets. This means, LIC IPO alone is equivalent to 12 IPOs of average size launched in FY21 and FY22.

So it’s still a fairly large IPO from a demand-supply perspective.

But does that mean it will fail?

Majority of large IPOs launched over the last two years, which now trade at a discount to their issue price are either loss making companies or they traded at insanely high valuations. You see, IPO valuation is more crucial than merely its size.

So how expensive or reasonable are LIC’s valuations?

After several rounds of deliberations, the government not only pruned the issue size but it also reworked LIC’s valuation which might have already taken care of market concerns. Now LIC is valued more in line with its global peers.  On top of that, it has offered a discount of Rs 60 per share to its policyholders and Rs 45 to other retail investors.

India is a young nation and its life insurance penetration is nowhere near its potential level. As a result, India’s private sector insurance companies trade at pricey valuations as compared to their global peers. But not LIC.

So what’s the final word on LIC IPO?

Well, you get the best deal in the town to naysayers and they will make it look like a dud. And get the worst deal to utopians and they will give it a shout-out. So leave aside what the market voices say, and even this poor blogger for that matter.

Apply your mind to the facts and numbers presented previously in this article. If you think the valuations and the safety nets, in the form of retail and policyholder discounts, offer you enough comfort, your dilemma on whether to invest in the LIC IPO is resolved.

You can watch this video to know more about LIC IPO

Food for thought…

Four listed life insurance companies—SBI Life, HDFC Life, ICICI Prudential Life and Max Life collectively account for merely 1.22% of Nifty 500. These stocks have lost 15%-30% from their all-time highs. While the overall lull in the market could be chiefly responsible for this decline, there is also a possibility that big institutional investors could be making way to accommodate the giant LIC.

Now it remains interesting to see how drastically this picture changes once markets recover. Will LIC expand the overall weightage of the life insurance sector in Nifty 500 or will the giant cannibalize others?

Hurry up! Open a Demat account now and be ready to invest in LIC IPO.

 

You may also like to read: 5 things that make the LIC IPO an interesting proposition

Disclaimer:

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.

We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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