Centre selling LIC for a song, undervalued IPO raises doubt
Hyderabad: Even as the mega IPO of insurance behemoth LIC is set for launch on May 4, serious doubts are being raised about deliberate undervaluation to benefit foreign investors. Investors would get to buy big stakes at heavily discounted prices. On the other hand, various reports indicate that the sale at the current price band […]
Hyderabad: Even as the mega IPO of insurance behemoth LIC is set for launch on May 4, serious doubts are being raised about deliberate undervaluation to benefit foreign investors. Investors would get to buy big stakes at heavily discounted prices.
On the other hand, various reports indicate that the sale at the current price band will result in a loss of Rs 25,000 crore to Rs 35,000 crore to the Government of India, the sole owner of LIC. Typically, for arriving at the market value of an insurance company, its embedded value (EV) — the present value of future profits plus adjusted net asset value — is multiplied by a factor of 2.5 to 3. But in the case of LIC, a multiplying factor of 1.1 was used to arrive at the market value. (see box)
“About two months ago, it was expected that the real worth of each LIC share would be arrived at by applying a multiplication factor of between 2.5 and 3 times of the Embedded Value. However, the government scaled down the valuation dramatically by using a multiplication of just 1.1 times the LIC’s estimated EV. A multiplication factor of 2.5 to 3 times is a standard metric for valuing insurance businesses,” said Prof K Nageshwar, a political analyst.
Listed life insurers such as HDFC Life, SBI Life and ICICI Prudential Life Insurance trade at valuations that are three times higher than their EV. The valuation of LIC is inexplicable given that LIC holds over three times the assets under management of all other life insurers combined.
Moreover, EV calculations, by definition, do not take the value of prime real estate controlled by LIC into account. This means the valuation of LIC at Rs 6 lakh crore is a significant underestimate. The LIC has real estate assets worth lakhs of crores across the country. Shareholders buying stocks via the IPO will also become the stakeholders in all these assets. “Divesting LIC itself is a bad thing. But when it is being divested, at least it should be done at the right value. The sharp cut-back in valuations is not only surprising but even inexplicable,” he said.
This undervaluation will adversely impact the disinvestment revenue accrued to the government in the present and future rounds. As per market regulator SEBI, the government has to divest at least 10% of LIC shares within two years and 25% in five years. Thus, the total loss due to the undervaluation will continue to adversely hit government revenues in future too. This will result in a humongous loss, he explained.
If the IPO misses its May 12 deadline, LIC will have to file updated data on its performance, which would further delay the IPO. Whether this compulsion can in any way justify the rush to disinvest is the crucial question, he said.
Decoding Numbers
Base value of each LIC share — Rs 853
The IPO size is 22.13 crore shares, which is 3.5% of the total number of shares
Real worth of each share is normally arrived at by applying a multiplication factor of 2.5 and 3. Hence, each share should have been valued between Rs 2,133 and Rs 2,559
At this price, it should fetch Rs 47,203 crore to Rs 56,631 crore
Govt’s Offer
LIC IPO price band pegged at Rs 902-949 per share
Will only fetch between Rs 20,000 crore and Rs 21,000 crore
This is a discount of 44-63%
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