Will investors have enough appetite for India’s largest-ever IPO?

Life Insurance Corporation’s IPO planned for next month can potentially raise about $8bn for the government

The sale of a stake in India's state-owned insurance group and investment company Life Insurance Corporation has great potential. Photo: AFP

India is gearing up for what is expected to be its biggest initial public offering (IPO) yet, as the government aims to sell a stake in the Life Insurance Corporation of India (LIC), which has the potential to raise about $8 billion.

Analysts expect the IPO of India's largest insurer to open next month, which will help New Delhi to shore up much-needed funds from its privatisation strategy, after finances were battered by the Covid-19 pandemic. India also has plans to increase spending in sectors including infrastructure, as it looks to add to growth momentum.

The LIC listing comes as Indian bourses have followed global cues on a downward trend, amid Russia-Ukraine tensions and expectations of the US Federal Reserve raising interest rates.

The IPO, however, is seen as critical to the Indian government's finances.

“The listing of LIC is crucial for the government to meet its assets sales goal and bridge the gap in the fiscal deficit,” said Samir Bahl, chief executive of investment banking at Mumbai-based Anand Rathi Advisors.

“Efforts to contain the spread of the virus [and] initial lockdowns have created a significant budget deficit.”

The government has set a target for a fiscal deficit of 6.4 per cent for the current financial year, which runs until the end of March, and hitting this goal hinges on the country raising $8bn from the LIC listing as it aims to sell 5 per cent of its stake. This would make it the country's largest IPO.

At $2.5bn, digital payments company Paytm’s share sale last year is so far the biggest IPO in India.

“One would like to have the [public] issue when the markets were buoyant, but then the government has to come out with the issue in this fiscal [year] to balance its budget,” said Vijay Singhania, chairman of TradeSmart, an online trading platform in India.

Although the government filed a draft IPO prospectus this month, the valuation has yet to be decided.

Set up in 1956, LIC has sold more than 280 million policies to date.

“Though the valuations are yet to be finalised, the government will be keen to ensure good participation from institutional as well as retail investors,” Mr Bahl said.

“The LIC brand has become synonymous with not only life insurance products but [is] also [considered] a safe investment for millions of Indians.”

Considering its size, LIC's listing is being viewed as a test of investor appetite and the depth of India's capital markets.

Several companies which listed last year, including Paytm and Policybazaar, are currently trading sharply below their offer prices. The benchmark Bombay Stock Exchange BSE Sensex index has slumped 2.74 per cent in the past month.

However, given the pedigree of LIC and the efforts that are going into its listing, experts say there is still a lot of potential for keen investor interest.

“The government and [the] regulator have been leaving no stone unturned to prepare and support for a successful IPO,” said Nirav Karkera, head of research at Indian finance company Fisdom.

“LIC has also been undertaking large-scale marketing and communication exercises to ensure high retail interest and preparedness. Considering that the insurance corporation's size is comparable to large global peers, one can expect a fair deal of interest from global investors.”

He, however, said that market conditions and sentiment cannot be ignored and that they do have the potential to play havoc with investor demand.

“Gloomy sentiments on the back of global geopolitics and macroeconomic curveballs are right at the top in the list of [possible] deterrents,” Mr Karkera said.

Current conditions may not be the most conducive for foreign investor participation, and that means the success of LIC's IPO will rely heavily on domestic demand, he said.

“The good news is that the IPO is being launched in a period of record-high increment in retail participation, while domestic institutions have been setting funds aside to develop an appetite for the mega listing.”

The company's valuation will also be crucial to the levels of interest in the IPO, brokers said.

“We believe that if the valuations will be in reasonable multiples, then the issue will receive lot of interest, not only from retail investors but also from institutions,” said Mohit Nigam, head, portfolio management services, Hem Securities.

However, it “is not the right time to list this IPO as markets are highly volatile”, he said.

“The investors can refrain [from] investing due to weak global cues, and most of the recent IPOs are trading at below their listing price.”

The LIC – given its size and how well established it is in the sector – is quite a different proposition than the start-ups with relatively high valuations which were listed last year, and have seen their shares slump, Mr Singhania said.

“While most of these companies were not profitable when they tapped the market, they managed to raise funds capitalising on the euphoria prevalent then,” he said.

“However, with most of the froth washed away in the market correction, we are now witnessing some sanity in this segment.”

Their performance is unlikely to have an impact on LIC's IPO, Mr Singhania said, adding that the insurance major will attract a different set of investors.

Another factor that could weigh on investor appetite is the ever-growing rivalry that LIC is having to contend with from private insurance companies, which has resulted in the firm losing some of its market share.

“While some may appreciate LIC’s strong two-third market share retained even after over two decades of being exposed to fierce competition, many may extrapolate the one-third share that slipped away,” Mr Karkera said.

Vinod Nair, head of research at Geojit Financial Services, said that “generally, the appetite for LIC's IPO will be high from common and new investors given its mammoth public brand value”.

“In the long-term, the end demand and performance will depend on its future growth, profitability and sustenance of market share in the life insurance industry,” he said.

Mr Nair and others share the view that “in the short-term, the valuation demanded by the government and discount provided to retail investors will define the success and performance of the offer”.

Mr Singhania said that “there are advantages for an investor when a company comes out with an issue during a muted phase: companies tend to be more cautious with their offer price to investors in a subdued market rather than in a buoyant market”.

LIC's listing is a key part of India's divestment programme, and following the successful privatisation of Air India, it will be closely watched.

“Importantly, it will also expedite the process of divestment of other government owned assets,” Mr Bahl said. “So, yes, this IPO is very significant to the government's cause towards disinvestment.”

The Indian government has struggled to hit its privatisation targets in recent years. But LIC has the full potential to give an enormous boost to these efforts.

With relatively low insurance penetration in India, a large population and expectations for strong economic growth in the coming years, many investors will see LIC as an attractive investment opportunity, analysts said.

“The LIC IPO is going to be jewel of all IPOs in India,” said Amit Jain, chief strategist, global asset class, Ashika Group.