February 21, 2022
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Any possbility of drastically curtailing LIC stake sale target ??
The count down of India’s largest IPO has started and the Government being the promoter of the company has filed DRHP with SEBI last week.
The Road show for this mega IPO has started to lure the foreign soverein funds and FIIs. However the leading Fund Experts tracking this IPO now fear the sharp cut in the IPO price and consequently the disinvestment target from this largest PSU insurance company.
These fund Experts site 3 major reasons which may induce the finance ministry to cut the disinvestment target from this company and IPO issue price.
Weak undertone of the world markets :
It is believed that the IPO is ill-timed. The sentiment across the stock-markets in all major countries is shattered and the markets are showing southward trend since last many sessions. Just look at the European stock markets. European markets were choppy on Monday as investors monitored the Russia-Ukraine situation and unexpectedly strong economic data from the euro zone and U.K. The pan-European Stoxx 600 index was down 1% during afternoon trade, having gained as much as 0.6% at the start of the session. Tech stocks dropped 2.4% as most sectors and major bourses slid into the red.
Shares in Asia-Pacific were mixed on Monday as investors continued to monitor the situation surrounding Ukraine, while China left its benchmark lending rate unchanged. Markets in the United States are closed Monday for the Presidents Day holiday, having dropped sharply on Friday as global markets were roiled by rising tensions in eastern Europe.However Dow sheds more than 200 points Friday, stocks fall for two straight weeks as Russia-Ukraine tensions roil markets. The indexes each lost more than 1% last week.
Investors have also been grappling with the outlook for Federal Reserve policy. St. Louis Fed President James Bullard, who had just called for aggressive action, warned that inflation could get out of control without rate hikes.
Low profitability cannot justify high valuations :
Till now , there is no announcement about the IPO price or IPO amount, only the number of shares to be offered through this IPO has been announced. If we have look at the performance of first half of the current year ( for more details ,Click : LIC H122 Performance )and the Earnings per share declared in the DRHP, the valuation which can be justified comes to only Rs. 450 to 500 and no more. If the Government wishes to raise Rs. 60000 crores from IPO , towards its Disinvestment target of the current fiscal, then the IPO has to be priced at Rs. 2000 per share . This price is very difficult to be justified based on the current profitability of the company, even though it enjoys very huge market share in India.
Valuation cannot be justified in Peer comparison.
The fund Experts with whom the Chanakya discussed, also indicated the PE multiples of HDFC Life Insurance and SBI Life insurance. In the Peer comparision, the DRHP clearly indicates SBI Life Insurance @ PE Multiple of 81.46 ,HDFC Life Insurance @ PE Multiple of 94.26 ,ICICI Prudential Life Insurance @ PE Multiple of 81.83. Accordingly, even if estimate PE of 100 for LIC, the reasonable valuation comes just nearer to Rs. 500 and not much. Even if we compare valuations of leading insurance companies of the world, Rs. 60000 crore estimated to be raised through disinvestment, cannot be justified.
Nagative GMP as of now:
The fund managers with whom the Chanakya discussed have also sited the Grey Market trend which clearly suggest nagative GMP as of now. This indicates, the grey market doesnot support the high valution currently expected in the range of Rs. 2000 per share ( Rs. 60000 disinvestment target for 5 % stake sale)
Looking to all these factors, some fund experts believe the Government will be forced to curtail disinvestment expectations from this IPO and try to raise the same at around Rs. 18000 to 20000 crore only. Only such step can sail through the IPO without any hiccups..
