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LIC IPO: What prompted the government to cut issue size by one-third, valuation by half?

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The much-awaited LIC IPO is set to open next week on 4 May, albeit a much smaller one than the one proposed earlier. The public sector behemoth filed its Red Herring Prospectus (RHP) with capital market regulator SEBI on Tuesday evening. However, a lot has changed since LIC filed its DRHP earlier this year in February. LIC is now looking to sell 221 million equity shares, down from 316 million it had planned earlier. The issue size has been trimmed down to 3.5% of equity, from 5% planned earlier. LIC also cut the valuation by half from the amount mentioned by the government in FY22 Budget. Despite the trims, LIC IPO will still be the largest ever public issue to hit Dalal Street.

Also read: LIC IPO: Shares trade at premium in grey market; Subscribe for listing gains or long-term dividend?

What prompted govt to slash LIC’s valuation from Rs 12 lakh crore to Rs 6 lakh crore

Analysts say that the government nearly halved LIC’s valuation after feedback from institutional investors, and recent capital outflows from the Indian and other emerging-economy markets following the Russia-Ukraine conflict. “LIC valuation has been cut by half as the government is looking to lure more investors and is now looking to sell 3.5% instead of 5%. The major reason to decrease the valuation is the ongoing volatility due to the war between Russia and Ukraine,” Animesh Malviya, Analyst, CapitalVia Global Research, told .com.

Narendra Solanki, Head – Equity Research (Fundamental), Anand Rathi Shares & Stock Brokers, told .com that while there is no definitive answer, it can be seen that ongoing Russia-Ukraine geopolitical crisis and dampened global macroeconomic cues had some negative impact on liquidity in near term which may have forced the government to reduce the valuation by half.

Bumper offer for retail applicants, LIC policyholders

LIC is the largest insurance provider company in India. During the start of the IPO, the valuation was pegged at Rs 12-13 lakh crore, but due to global economic factors and increased volatility, the government has decided to slash the valuation to about Rs 6 lakh crores,” Santosh Meena, Head of Research, Swastika Investmart said. “So, at a valuation of Rs 6 lakh crores, the issue is priced at a Price to Embedded Value of 1.1, which is at a discount compared to its listed India as well as global peers,” Meena added.

Meena also said that the valuation of 1.1 times Price to Embedded Value discounts the above concerns and policy holders getting a discount of Rs 60 makes this a bumper offer. “We recommend this issue for long term only and policyholders must grab this opportunity because of the discount given,” he said. The maximum investment limit is Rs 2 lakh distinctly for applications under retail, policyholder, and employee categories. Thus, a policyholder can apply for shares worth a maximum of Rs 2 lakh under the policyholder category and an additional Rs 2 lakh under the retail category.

Valuation reduced to make offer competitive with private companies

Vishal Wagh, Research Head of Bonanza Portfolio said, “It is a very smart move by the government to bring a big IPO like that of LIC with a stiff lower valuation estimate compared to the initial 12 lakh crore. It will boost the interest in retail as well as the institutions. The current market conditions and outflow of FII is majora concern to bring a big IPO into the market. So, it becomes necessary to be competitive with private players. This may have prompted the government to cut the valuation to Rs 6 lakh crore. If the same IPO could have come in last calendar year, the higher valuation could have got buyers as euphoria was very high. Now, the market scenario is more or less in conscious mode.”

LIC IPO valuation fair, not cheap

Mohit Nigam, Head – PMS, Hem Securities, said, “The initial aggressive valuation of LIC was 13 lakh crore which has been cut by half to 6 lakh crore. Now the valuations have not become cheap but fair and will now depend on how its business is executed over the next few years to forecast the additional returns. Considering the recent market performance of its peers, they have performed well, are available at reasonable prices and have been witnessing continuous growth and increase in market share. LIC’s peers have been trading at an average PE of 80-82 while the PE multiple of LIC, according to the IPO, was 400 earlier. With the reduced IPO size, the PE multiple has halved which can now be considered fair to subscribe to the issue. Apart from that, weak global market cues and geopolitical tensions were also other factors that the government had considered to cut the IPO size.”

The stock recommendations in this story are by the respective research analysts and brokerage firms. TheSpuzz Online does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.

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