What the mega-IPO means for the markets

Life Insurance Corporation’s (LIC) mega initial public offering (IPO) comes as markets are volatile and Foreign Portfolio Investors (REITs) pull out of Indian equities following the rate tightening of the American Fed. After its listing, the insurer will be among the three most valued stocks in India after Reliance Industries and Tata Consultancy Services. The Indian government plans to sell 5% of the capital for Rs 65,000 crore (8.7 billion dollars) in the insurance giant Life Insurance Corporation.

LIC IPO: the Aramco moment in India

The anticipation is high for LIC registration. Some bankers have called the IPO India’s Aramco moment, referring to the Gulf oil giant’s $29.4 billion listing in 2019 – the largest in the world. But preparations to sell a 65-year-old insurer regularly commissioned to rescue ailing banks and state assets were halted from the start.

There is another way to look at the size of LIC by considering its assets under management (AUM). As of September 30, this stood at 39.6 trillion rupees. The total AUM of mutual funds operating in India stood at Rs 36.7 trillion. Thus, as of September 30, LIC was larger than the entire Indian mutual fund industry combined.

Additionally, LIC has about Rs 9.8 trillion invested in shares. Interestingly, LIC’s investments in stocks accounted for about 4% of the National Stock Exchange’s market capitalization as of September 30.

As for stocks, the total AUM of Indian mutual funds stood at 12.8 trillion rupees, which is more than the amount of money that LIC invested in stocks. Nonetheless, LIC’s equity portfolio is more than three-quarters the size of equity investments of the entire Indian mutual fund industry.

IPO of LIC: headwinds could slow down the listing

Some reports suggest that now may not be the best time to go public. The success of LIC’s IPO would depend on the performance of the capital market. The Indian stock market reached new highs in 2021 and was the best performer among its global peers due to favorable macroeconomic conditions, strong corporate earnings and inflows from retail investors.

According to a report by HSBC, FII flows will flow back to China from India in 2022, compared to 2021 when money flowed from China to India. On Feb. 14, the stock market experienced its biggest single-day drop in 10 months. The stock market tumbled 3% amid escalating tensions between Russia and Ukraine, which sent oil prices boiling over. And since then, the markets have been turbulent.

IPO of LIC: impact on other insurance stocks

“The IPO will continue to weigh on LIC’s competitors as investors reduce their stakes in the three listed private life insurers to make room for the public insurer. Historically, market leaders are the first to list. It’s a rare time when a great player is listed very late. For any fund manager to have a player that has over 60% market share instead of individually owning those with 10-11% market share is a very natural aspiration,” said Vidya Bala, co-founder of Primelnvestor, an equity and mutual fund research firm, told Reuters.

UBS Securities expects the listing of LIC to have positive externalities for the life insurance industry, as it could lead to greater awareness that will also benefit private companies. That said, the brokerage firm does not expect LIC to improve the share of protection products in its product line anytime soon, given its ethos of being a savings vehicle for Indians.

“We believe the potential issue could bring transparency to LIC’s operations and increase the rationality of its business decisions,” UBS Securities said.

IPO of LIC: impact on the markets

Ventura Securities in its note said: “You see, Covid-19 was a stress test for Indian life insurance companies. Given their consistent performance even during such a tricky phase, they are likely to be on a firm growth trajectory in the future. And LIC, as the market leader, has the best chance to seize future growth opportunities.”

LIC’s IPO will eliminate market liquidity

However, analysts have mixed views that LIC’s IPO will deplete equity market liquidity. The large issuance would impact secondary market liquidity, they say.

“There is enough liquidity in the market right now,” said Ajit Mishra, VP of Religare Broking Research. However, he did not rule out the possibility of a short-term impact as continued selling pressure from FIIs kept participants on their toes.

Based on previous experiences, others believe that big issues compress liquidity for a while and impact stock flows for a short time, which also disrupts sentiment for secondary markets.

Piyush Nagda, head of investment products, Prabhudas Lilladher, said mega-issues affect liquidity in secondary markets as investors shift funds from the secondary market to the primary market.

“LIC, being the biggest IPO ever in Indian history, is sure to suck liquidity from the markets,” he added.

LIC IPO: for retail investors

Vinod Nair, Head of Research at Geojit Financial Services, said: “In general, the appetite for LIC’s IPO will be high from common and new investors given the gigantic value of its public brand. . However, in the long term, ultimate demand and performance will depend on its future growth, profitability and maintaining market share in the life insurance industry. While in the short term, the valuation required by the government and the discount given to retail investors will define the success and performance of the offering. We can assume that strong demand or vice versa depends on the government mandated assessment of LIC’s intrinsic value being at a discount or premium to the insurance industry average.”

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