lic: Why LIC is more than a hope story, Hemang Jani explains

On a scale of one to ten, what are the chances that LIC IPO in the short term will give a pop, a medium term outperformance and a long term chance to create wealth?
I would like to say that the market sentiment has turned upside down and in the last about 12 months, we had a lot of appetite for highly priced exotic business models, fintech startups and we have all seen kind of euphoria and after that, we have seen the kind of correction that we are going through right now.

So the clear trend which is emerging is that investors are looking out for reasonably priced companies where something is there for investors at the price at which the issue is offered, better ROAs, better numbers and not something where one does not know what will happen three or five years down the line.

There is always hope when there is a startup that some big story will emerge but currently we are in a situation where people are looking out for hard numbers in terms of cash flow, profitability, ROAs, strong customer franchise, etc. Given all of that, definitely the pricing is looking very fair, reasonable and on top of that you have some discount for the policyholders and the retail investors.

I believe that at least 10% to 15% listing gain should happen. Of course, the caveat would be that things should not go too bad when the listing actually happens in terms of global market sentiment. But in the current scenario, it looks like there is a case for a 10% to 15% upside. Longer term, it is very difficult to gauge.

Numbers are looking very solid but there are two areas that we have to be mindful of the government will keep offering more equity over the next two years because currently what we are seeing is just 3.5% so that is going to be one big overhang. Secondly, it all depends upon what kind of growth and what kind of market share LIC can garner because at the end of the day, PSUs have their own issues to deal with — efficiency, what kind of investment management team do they have, what kind of products, digitisation so things are not very clear. So it would be very difficult to take a three- to five-year view here but yes at least in the short run we do expect some good gains.

If I look at the history of big IPOs – Paytm, Coal India and Reliance Power – none of the IPOs which are big IPOs are anywhere close to their offer price also. Now LIC is large which means the appetite in the short term will be taken care of. The government supply will be there for the next two years at least. So what are the chances the issue may not make money only?
Given the pricing that they have finalised, coupled with the discount because discount of Rs 45 to Rs 60 is also significant enough in terms of investors. A better pricing with discount would ensure that there is good listing, barring very extreme unforeseen circumstances of some global meltdown, etc.

They have tried to genuinely leave something on the table for retail investors and some of the large IPOs have actually not performed. So, when one looks at IPOs, one should look at the listing gains and then over a period of time, how much money people have made given the performance of the company.

In majority of the cases, the listing gains have been good. In the case of Coal India, there was so much euphoria and there was so much excitement that all retail investors will make money and therefore the discount. Of course, what happened after that is a different story but I think in the current scenario, the pricing and the overall proposition for investors is reasonably good.

Is LIC still a hope story? Is it worth betting on a hope story in this kind of market?
If you look at the numbers, the kind of positioning that LIC has in terms of its network, the client franchise, the penetration in the tier II, tier III in the rural areas is quite phenomenal. I would not say that it is just a hope story. Definitely it is backed by very strong performance, market share, profitability and a team and a brand which is absolutely visible to everybody.

My only concern is that typically a PSU company which has a large market share on the face of it, the numbers and valuations will look attractive but given the kind of landscape that we are in where there are aggressive players which have already let us say built very strong business model, digital platform, differentiated products offering and a team which is doing exceptionally good job at managing large scale AUM. These are the things where LIC will have to complete with private players and quarter on quarter there is going to be a comparison between what LIC has done versus HDFC Life and ICICI Pru and so on and so forth.

I think a government company may have some issues in terms of delivering that would not be received too well by the investors. So when you are looking at the next one or two years, these are the challenges that you will have to keep in mind. I do not think there is too much risk at this price point.