LIC share plunge burns investors in India's familiar big-ticket IPO failure

The state-controlled insurer's shares have plummeted 31% since debut, losing about $17bn in market value

M. R.  Kumar, chairman of LIC, poses with the bull statue at the company's listing ceremony at the Bombay Stock Exchange in May 17. State-run insurer's shares have plunged since its trading debut. BloShow more

A sharp fall in the share price of Life Insurance Corporation of India (LIC) in only over a month since its trading debut has caught investors and analysts off guard.

The company pulled off India's biggest-ever initial public offering earlier this year, raising around $2.7 billion after the government sold its 3.5 per cent stake in the state-controlled insurer. However, it closed the first day of its trading on May 17, more than 8 per cent lower. The losing streak has not stopped since and about $17bn of the company's market value so far has been wiped off.

LIC's shares have slumped 31 per cent to 654 rupees ($8.39) from its issue price of 949 rupees.

“This sharp correction is a bit surprising,” said Abhay Agarwal, founder and managing director of an investment management company Piper Serica Advisors. “The government priced the IPO fairly and gave big discounts to retail investor and policy holders. However, it looks like the poor market sentiment has hit the price hard.”

Analysts say that the "unfavourable timing" of the listing played a big role in LIC’s share price slump as it comes amid a global sell-off. But there are also factors related to the company itself that are making investors wary, including growing competition with private insurance firms.

“While the steep fall came as a surprise, we did not expect a big bang listing either,” said Vinit Bolinjkar, head of research at Ventura Securities. “We believe the timing was not correct for the IPO given the ongoing [Russia-Ukraine] war, soaring crude prices [and] interest rate hikes.”

Traditionally, LIC has largely sold just one type of life insurance policies and the market is sceptical on how it would be able to "change the approach and start selling high margin savings policies”, Mr Bolinjkar said.

The narrow product focus is giving "some of its newer rivals an advantage" and that has contributed to LIC's share fall, he added.

The plunge has further dampened investors' mood, given the market excitement and anticipation of the company's much-delayed listing during the build-up period.

“Investors have burnt their fingers and hence will be apprehensive to invest in issues of public sector companies, at least for the near term,” Mr Bolinjkar said.

The fall puts LIC, India's largest and oldest insurance company, in second place in Asia in terms of the extent of its market capitalisation loss since listing, after South Korea's LG Energy, according to Bloomberg.

Established in 1956, LIC has sold 280 million policies and is the world's fifth-largest insurance company in terms of insurance premium collections.

As well as raising funds for the government, the move was also intended to expand India's capital markets. The IPO was described as the country's Saudi Aramco moment, a reference to Aramco's $29.4bn listing in 2019, which was the world's biggest and helped broadening and deepening Saudi Arabia's capital market.

LIC's listing in May took place amid tough market conditions exacerbated by Russia's military assault on Ukraine and tightening of liquidity in global capital markets.

Demand was strong for the public offering of LIC — a household name in India — as many first-time investors flocked to buy into the company.

The enthusiasm, however, diminished with every trading day as losses continued despite many bullish calls by equity analysts. The market was betting on the company's pedigree and the fact that it still has the lion's share of the life insurance market in India — a sector which is underpenetrated and has enormous scope for growth.

Tuhin Kanta Pandey, secretary at the Indian government's department of investment and public asset management, this month told reporters that he was “concerned” about LIC's poor stock market performance.

However, he termed the stock price loss as a “temporary blip as investors are taking time to understand the fundamentals of the company and its business profile”, The Financial Express quoted him as saying at the time.

LIC's management would “look into all these aspects with a view to raising the shareholders’ value”, Mr Pandey added.

The Indian government decided to list LIC as part of its wider divestment programme, as it strives to raise funds to keep its fiscal deficit under control after the Covid-19 pandemic put an enormous strain on its finances. New Delhi has set a fiscal deficit target of 6.4 per cent of gross domestic product for the current financial year, which runs until the end of March 2023.

“LIC's share price is down in conjunction with the broader market condition,” said Rohit Beri, chief investment officer at True Beacon, a Bengaluru-based alternative investment fund.

But “the fall has been sharper, due to factors such as ambiguity about business metrics and the [market] euphoria coming to an end”, he added.

LIC’s IPO overtook the 183bn rupee listing of digital payments company Paytm, which made its stock market debut on the BSE (formerly Bombay Stock Exchange) and National Stock Exchange in November last year.

Paytm's IPO was also keenly anticipated and came amid a record-breaking year for the amount raised in new listings on India's stock markets. However, Paytm's public float was a big disappointment for investors.

Its shares are down about 70 per cent from its issue price.

A number of other start-ups that listed last year have also had their stocks drop, including fashion and beauty e-commerce company Nykaa, which was founded by Falguni Nayar, and insurance comparison website PolicyBazaar.

“It was always evident that the bull run would not prolong forever,” Mr Beri said.

“The primary market was getting flooded with companies, especially new-age companies, which were not yet ripe to go public but tried to encash the bull run,” Mr Bolinjkar said.

India's benchmark S&P BSE Sensex has fallen more than 13 per cent since the beginning of the year.

Siddarth Bhamre, head of research at Religare Broking, said that he does not, however, believe that LIC's stock price plunge is anything “extraordinary”, pointing out that other insurance stocks including HDFC Life and ICICI Prudential Life Insurance had similar percentages of correction from their highs last year.

The drop in LIC's share price has also created new opportunities to buy into the stock at discounted rates.

“Even at the listing price, we were of the opinion that valuation-wise LIC is quite attractive,” Mr Bhamre said. “This correction has only made it more attractive.”

The slump experienced in the wave of start-up listings, however, is concerning from an investor point of view, he adds.

“Those new-age cash guzzling business listed at exuberant valuations [and] the amount of wealth destruction there is far higher,” Mr Bhamre said.

Mr Agarwal said that he also finds this trend “quite worrying" as it shakes up investor confidence and crimps the ability of even good companies gaining access to capital markets.

“Aggressive pricing in IPOs of companies with poor fundamentals will erode the confidence of retail investors for a very long period of time.”

The interest in LIC's shares has also been affected by the fact that the government is expected to divest more of a company, potentially up to 25 per cent over the next few years, analysts say.

The situation with LIC shares slump may force the government to rethink pricing of the future public floats of government sector entities.

“While the LIC IPO was a dampener for the government's disinvestment plans, other public sector issues may be priced more reasonably,” said Tanushree Banerjee, co-head of research at Equitymaster.

Mumbai-based Emkay Global Research in a research note described LIC as “the elephant that can't dance”, as it initiated its coverage on the stock. However, it recommended that investors "hold" the shares, with expectations that LIC's stock price will pick up in due course.

“With any signs of recovery in the market we believe that value investors will look at LIC stock in a favourable manner,” Mr Agarwal said. “However, investors should not start expecting the price to go to the IPO price level anytime soon.”