LIC stock down 30% from issue price, valuation not cheap

LIC stock down 30% from issue price, valuation not cheap

On May 17th, the listing of Life Insurance Corporation of India, or LIC, was a momentous occasion for the Indian stock markets. Since then, the benchmark S&P BSE Sensex has lost 5 per cent, while the LIC stock is down nearly 30 per cent from its issue price of Rs 949.

Policyholders and employees of the insurance major, in which the government still owns 96.5 per cent, can take solace in the fact that they were allotted shares at a discount of 60 from the issue price. If they still hold the shares, about one-fourth of their wealth has already been wiped off.

Even if the government and LIC have said that there is value in the company and LIC is a long-term bet, stock markets can be tricky at times - not only for the investors but also for the companies.

One might argue that the market sentiment is weak. Since LIC listed, HDFC Life Insurance, SBI Life Insurance and ICICI Prudential Life Insurance are up 3 -- 5 per cent.

Did it get the math wrong when it came to its issue price and valuation? Is the market punishing it for its lack of transparency?

The ability to sell high-margin non-par products, as opposed to par products that provide policyholders a significant share of policyholder's surplus, will require a change in the mindset of the organisation and its agency force, which could be LIC's biggest challenge, said Macquarie Research in its first report on LIC.

It highlighted the fact that the embedded value of LIC has inherent volatility, since Nikhil Kamath, Co-founder of Zerodha, believes that there is nothing wrong with LIC, but the valuation is not cheap, and that is a challenge for an insurance company. For a company with a PAT of 10,000 crore on average, its market cap is about Rs 4.5 lakh crore. He says that there is room for further correction if we are talking about forward earnings of Rs 900 in FY 24 and the Nifty will be at a 17 x or 18 x forward PE.

It doesn't bode well for investors who bought shares in the IPO. The stock returns are not insured, because LIC policies are safe, backed by a sovereign guarantee.