After Zomato: The IPO-to-Profitability Journey, the LIC IPO answers a different IPO question: really should a mature life security business beryllium weighted erstwhile accepted marketplace multiples do not work? LIC's May 2022 IPO astatine ₹949/share raised ₹20,557 Cr, but the existent question and reply instruction is that a debased Price / EV aggregate looked charismatic while anemic VNB margins showed why the banal was inexpensive for a reason.
- LIC's May 2022 IPO astatine ₹949/share was a 5% GoI liking divestment and raised ₹20,557 Cr - India's largest ever IPO.
- The woody forced analysts to study a caller valuation metric: Embedded Value.
- Traditional P/E is meaningless for life insurance. Analysts usage Embedded Value, Price / EV, VNB Margin, and APE Growth.
- LIC's 1.1x P/EV looked inexpensive vs HDFC Life's 4.9x, but LIC's VNB separator was ~9% vs HDFC Life's ~26%.
- VNB separator = profitability of NEW policies. Low VNB = caller business is hardly profitable.
- Stock fell to ₹530 wrong 6 months, and IPO investors mislaid 44% earlier FY24 betterment to ₹1,000+ levels.
- PSU divestment IPOs often spot trading by HNI/QIB post-listing, creating overhang.
Big Picture: LIC IPO arsenic a Sector-Specific Valuation Lesson
LIC's IPO was not conscionable a ample nationalist offering. It was a lawsuit wherever accepted P/E was irrelevant and the correct metric was P/EV AND VNB margin.
The cardinal correction was treating a debased P/EV aggregate arsenic automatically cheap. LIC's 1.1x P/EV looked inexpensive vs HDFC Life's 4.9x, but LIC's VNB separator was acold beneath HDFC Life.
LIC IPO astatine a Glance
LIC's May 2022 IPO astatine ₹949/share progressive a 5% GoI liking divestment. The Government of India retained 95%, and the rumor raised ₹20,557 Cr.
Embedded Value (EV) = NAV + PV of in-force profits.
Embedded Value vs P/E for Insurance
Traditional P/E is meaningless for life insurance. Analysts usage sector-specific metrics that link valuation pinch the profitability and maturation of policies.
VNB separator = profitability of NEW policies. Low VNB = caller business is hardly profitable.
Why LIC Was Priced Wrong
LIC's 1.1x P/EV looks inexpensive vs HDFC Life's 4.9x, but LIC's VNB separator (9%) was acold beneath HDFC Life (26%). A elemental P/EV comparison missed this nuance.
The question and reply instruction is straightforward: LIC was not really inexpensive - it was inexpensive for a reason. A debased valuation aggregate must beryllium publication pinch profitability of caller business and maturation quality.
Post-Listing Reality and FY24 Recovery
Post-listing, the banal fell to ₹530 wrong 6 months, and IPO investors mislaid 44%. In FY24 recovery, banal recovered to ₹1,000+ and Embedded Value grew 15% to ₹6.5 lakh Cr.
This makes LIC a useful finance woody breakdown because the IPO had some a valuation discount and a betterment story. The correct mentation depends connected reference the sector-specific metrics, not conscionable the header IPO size.
PSU Divestment Overhang
PSU divestment IPOs often spot trading by HNI/QIB post-listing, creating overhang. This is an important nuance because the IPO building and investor behaviour tin impact short-term listing capacity moreover erstwhile the institution is simply a ample franchise.
Note: All figures are illustrative/approximate and for acquisition purposes only. Sources: Company yearly reports, SEBI filings, RBI data, and publically disposable information.
Structuring a The LIC IPO Interview Answer
"Why was LIC priced astatine a debased P/EV aggregate compared pinch HDFC Life, and was it really cheap?"
Do not extremity astatine the 1.1x P/EV versus 4.9x P/EV comparison. The cardinal is to link valuation to VNB margin, because a elemental P/EV comparison missed this nuance.
The astir predominant correction is saying LIC was inexpensive only because it traded astatine 1.1x P/EV versus HDFC Life astatine 4.9x. That reply misses the logic for the discount: LIC's VNB separator was ~9% while HDFC Life's was ~26%, truthful the caller business was hardly profitable.
Conclusion
The LIC IPO is simply a instruction successful sector-specific valuation: P/E was irrelevant, P/EV unsocial was incomplete, and VNB separator explained the evident discount. In interviews, the strongest reply is that LIC looked cheap, but it was inexpensive for a reason.
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