Look at the gray market premium. These are not benchmarks. These are indicative returns. I have been told that the LIC issue is trading at a premium. It looks like the markets are pretty much realizing that LIC is a problem where there is money to be made in the short term, medium term, long term?
Granted, for retailers and policyholders, there’s a nice extra 5% to 8% to be made here. Such excitement is good, it had to be built and when the government is determined to push its greatest enterprise. It’s good and there might be a pop list. But as we’ve discussed many times, LIC is a giant not so used to working with what public market investors want. So, even if there is excitement, some announcements can create more excitement. But yes, we have to be rational in the sense that this is a big business and it will take time to make real profit out of it.
Where do you think LIC would settle three to six months after registration?
This is a difficult question to answer. Even if you’re going to point a gun to my head, I have to put a fork in – somewhere between plus 0% and 20% upside. That’s what I’m looking at when it comes to this stock. The reason is that the government is selling a 3% stake in this and so there will be more to come. As the one-year period recedes, this fear will also begin to accumulate in the stock.
In the meantime, many issues have been raised by institutional investors or the analyst community. Just before the IPO, LIC was kind of demutualized and the intrinsic value (EV) went from Rs 20,000 crore to around Rs 5 lakh crore and you know VNB margins also increased just before the IPO in stock exchange.
Although I don’t think those are really big concerns right now because LIC was governed in a very different way before the IPO and now after the IPO, its profits and everything will be governed from a very different way. It doesn’t bother me too much, but these are too new things and the market will take three, six, nine months to digest this.
Second, what LIC has in its favor is that as the economy opens up, insurance policies need a person to go and sell the policies physically. The next six months could therefore be good for the sector as a whole. I just think the gains we’ll see from IPOs could probably stay and we won’t see a fiasco like the ones we’ve seen in many government listings over the past decade. I would be really calibrated that the prices are right, there is excitement, there is hope, but yeah, let’s see LIC deliver over the next three, six, nine months.
The integrated value is 1:1. This is at a significant discount when it comes to private insurance companies. What will be the impact on the rest of the space?
The rest of space has been consolidating for quite a long time for two reasons; the first is that due to Covid they have had slightly higher claims than their usual trajectory and the second is that the growth has been quite moderate because as we have discussed in the past no one wakes up in the morning to buy insurance.
India is yet another country where insurance must be sold. So both factors are now coming to an end. In some ways the physical economy is opening up, people can meet, people can discuss business and sell insurance and two, claims won’t be as high as we’ve seen in the Covid years.
I think the industry as a whole looks good to me for the next 12 months, but the wild card in the pack here is what LIC is doing in new age insurance products. LIC has generally not been very aggressive in non-participating products like ULIP or credit-linked insurance or personal protection. If LIC decides to go aggressive, then in the longer term, private insurance companies see them as the most profitable products of private insurance companies and their valuations are very high compared to an LIC, because their margins are high because of these products.
If LIC decides to enter these products, I think there could be competition. See in the past we have seen that government companies can never really disrupt the private market very quickly (4:00) slow to react so LIC launched its first ULIP plans on Oct 20 this is still not really picked up from the way a LIC machinery can really push this product so I think LIC needs to train their 13 lakh officers and it will be a slow change.
For private insurers, the next year is looking good and over the next year we will see a lot more interaction from LIC over the next 12 months.