Will mega LIC IPO squeeze liquidity out from Dalal Street?

Since the Life Insurance Corporation of India (LIC) has filed its draft red herring prospectus (DRHP) with the capital market regulator, there has been a lot of buzz around its issue size and valuation.

With the proposed sale of more than 31.62 crore equity shares or 5 per cent stake, as an offer for sale, investors have all eyes set on the mathematics, with some calculations and a few speculations.

According to reports, the government is likely to fetch Rs 60,000 crore ($8 billion) from the initial public offering (IPO) of the insurance behemoth.

Mitul Shah Head of Research at Reliance Securities said that the issue size of the IPO would be enough to help the government to meet their divestment target for the fiscal year.

“We can presume a high demand or vice versa depending on the valuation demanded by the government on LIC’s embedded value is at discount or premium to the insurance industry average,” said Vinod Nair, Head of Research at Geojit Financial Services

The embedded value of LIC as of September 2021 is estimated at 5.39 lakh crore, DIPAM secretary in his tweet. Other listed private players are currently trading at 3 to 4 times their embedded value.

If the same multiples of the embedded value are applied on LIC, the issue size is likely to be in the range of Rs 80,000-1,00,000 crore. However, a few analysts, being conservative, do not agree with such a mammoth issue size.

Ajit Mishra, VP Research Religare Broking expects the LIC IPO to be around Rs 50,000 crore to 70,000 crore depending on the valuation government finally set for the IPO.

Piyush Nagda, Head – Investment Products, Prabhudas Lilladher has similar views on the issue size and expects the government to offload its 5 per cent stake for Rs 60,000-70,000 crore.

The valuation demanded by the government and discount provided to retail investors will define the success and subscription numbers for the offer, market experts said.

“The appetite for LIC IPO will be high from retail and new investors given its public brand value,” Nair said. “However, 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.”

The retail portion has been fixed at 35 per cent of the offer. The issue is likely to have reservations for eligible employees and policyholders of the company, according to the DRHP.

However, analysts have mixed opinions on the fact that the LIC IPO will squeeze out liquidity from the equity markets. The large issue would have an impact on the liquidity in the secondary market, they say.

“There is adequate liquidity in the market currently,” Mishra said. However, he did not discard the possibility of short-term impact following the continued selling pressure from FIIs which has kept the participants on their toes.

From the previous experiences, others believe that big issues squeeze liquidity for a moment and impact equity flow for a short period, which jitters the sentiments for secondary markets too.

Nadga of Prabhudas Lilladher said that the mega issues affect liquidity in secondary markets as investors rotate the funds from secondary to the primary market.

“LIC, being the largest ever IPO in Indian history, is bound to suck the liquidity from markets,” he added.

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