Why is investing in LIC IPO a lousy investment
The Life insurance Corporation of India (LIC) came into existence in 1956 by merging state-owned insurance companies. In a socialist setup, LIC was the only vehicle for the financialization of the Indian economy. However, it was not until 1991 that private players were allowed. LIC still is like a megalodon in the Indian insurance sector.
Often investors get driven by the size of the organizations and not the variables that drive valuation. Three factors indicate the value of a company - growth, cost, and cash flow.
The Indian insurance market is underpenetrated, but LIC has a competitive threat from private players. In the last few years, whenever I have purchased a term plan, I evaluated LIC but had to go with a private player due to the pricing. Interestingly, LIC is aware of the competitive landscape, but they choose to do nothing. So gradually, the market share is being taken over by private players.
LIC is a government-owned entity; therefore, the cost will be minimal. However, it may be interesting to see how the government plans to use the proceeds from LIC IPO. Irrespective of the country, a government is not the best capital allocator. Private players best manage the task of prudent capital allocation. Think about it: banking frauds happen in public sector banks, not in private banks. Government officials drive public sector entities, and we all know what they are interested in.
There is no business of government in the business.
Cash flow concern
Given the size and the complexities of LIC business and investing, even the most prominent firms will not be able to assess the growth, cost, and cash flow of LIC. Most of the hype around the IPO is based on ‘wishful thinking’ and not so much on analytics. Note that LIC owes Rs 75k crore to tax authorities. IPO proceeds will be used to pay these dues. Tax collections will be turned in to the government. I am still scratching my head to understand how the proceeds will be used to benefit LIC shareholders.
Let’s reflect on the game of IPOs
No. 1 Promoter
No. 2 Investment Banker
In the case of LIC, the government of India is the promoter of the company. Liquidity needs are often the reason for a private player's IPO. In the government's case, what is the need? It is simply to meet pandemic-related outflows.
The second player is the investment bankers who work for a fee. These banks are paid a certain percentage of IPOs. The bigger the size, the larger the fees.
I do not see ‘investors in this game.’ What incentive would a promoter have to leave something for the investor? In the case of a private company, none. In the case of a government-owned company, questionable.
The main reason why investors prefer government-owned companies is the high dividend yield. Coal India, a monopoly play in the Indian coal sector, has a dividend yield of 8.7%. The company has a dismal stock price performance even when facing supply issues. (10 years stock price return -6%, 5 years -8%, 3 years -10%). LIC may have a high dividend yield but at the cost of capital erosion.
There are so many brokerage houses writing about why you should subscribe. Other than dividend yield, I think all other reasons are speculative. Investing in over a long-term and not so much restricted to the listing gains, there may or may not be listing gains.
In what situation is the investment in LIC justified? In case of a market collapse, the difference between market value and embedded value may become wide. That is the time to analyze and invest. Until then, just be a spectator.
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