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LIC shines in primary market, but further stake sale, fate of stock remain uncertain

The maiden preliminary public provide (IPO) of Life Insurance Corporation of India (LIC) is closing immediately with over 2.04 instances subscription, leaving consultants guessing over the destiny of one other spherical of fairness dilution by the federal government.

LIC policyholders made a robust sprint for the difficulty by subscribing to five.39 instances their allotted portion, whereas the workers of the company put in bids equal to 4 instances their quota. Retail buyers bid for a file 1.72 instances their allotment, whereas the reserved portion for non-institutional buyers was booked 1.39 instances and QIBs portion 1.17 instances as bidding got here to a detailed on Could 9. Though the demand from excessive net-worth people and institutional buyers have hardly been encouraging, the difficulty was totally subscribed.

The prevailing market sentiments, nevertheless, appear to have dented the prospects of a bumper itemizing for LIC as it’s mirrored within the decline in gray market premium (GMP) immediately. As per IPO Watch, which tracks the gray market, the GMP for the inventory declined to Rs 40 from Rs 60 on Could 7.

The federal government goals to garner Rs 21,000 crore by liquidating 3.5 p.c stake within the state-run insurance coverage main however has additionally dominated out any additional stake sale in LIC over the subsequent one 12 months, after which there is likely to be a number of extra rounds of fairness dilution to attain its divestment goal and to deliver down its personal holding in compliance with the regulatory necessities.

Subsequent spherical of fairness dilution

In response to the Securities and Alternate Board of India (Sebi) tips, listed entities with over Rs 1 lakh crore valuation must have a minimum of 25 p.c public shareholding inside 5 years of itemizing. However the authorities had exempted public sector entities from this norm.

“We don’t anticipate additional dilution by the federal government for the regulatory necessities, nevertheless, for an additional capital elevating by way of divestment, the federal government might offload extra of the inventory subsequent 12 months,” mentioned Sonam Srivastava, Founder of Wright Analysis.

Some consultants mentioned that prime officers of LIC had clarified whereas answering questions from potential buyers throughout roadshows, that the Authorities of India doesn’t have any plan of additional dilution of its stake within the company as LIC has adequate capital for the subsequent two years and will not require any funding help from the federal government.

“The federal government is unlikely to additional cut back its stake within the insurer for a minimum of the subsequent two years as a result of such a transfer might have an effect on returns for buyers collaborating within the mega preliminary public providing (IPO),” Mohit Nigam, Head – PMS, Hem Securities, mentioned.

Impression of additional fairness dilution on the inventory value

The query that arises on this state of affairs is how the subsequent spherical of divestment, every time it occurs, will play out on the inventory value. Consultants are of the opinion that although the follow-up concern might need some influence on the costs, the corporate will stay a sexy funding possibility for buyers, given its dimension and stand within the insurance coverage sector.

“As with all firm which has some overhang – whether or not it’s personal fairness holding that may essentially get diluted (as a result of funds have funding horizons) or with Minimal Public Shareholding (MPS) guidelines to be complied with – there can be some strain on the value across the occasion, however I don’t see it as essentially impacting the long-term pattern negatively,” mentioned Venkatraghavan S, Managing Director and Head of Fairness Capital Markets at Equirus.

If there is a follow-on public provide subsequent 12 months, the response from buyers will rely totally on three components – the returns from the IPO, the efficiency of the corporate an the inventory by way of the one 12 months, and the market atmosphere.

“LIC being a large firm with a substantial market share will proceed to be enticing within the listed house, although the insurance coverage trade is turning into aggressive with the listed gamers,” Srivastava mentioned.

There are some market observers who see the follow-on concern impacting the inventory to a sure extent. “Prior to now, we’ve seen PSU (public sector enterprise) shares coming below promoting strain on the  expectation or announcement of a recent OFS by the federal government and within the case of LIC we don’t anticipate something totally different until LIC performs exceptionally nicely in the mean time and funds fall over each other to personal some stake in it,” mentioned Deepak Jasani, Head of Retail Analysis, HDFC Securities.

FPO will then give such a chance and therefore the inventory value could stay agency in that state of affairs.

Will the inventory make it to any of the indices?

The standards for inclusion within the Nifty 50 and the Sensex are extremely stringent and primarily based on free-float market caps. With solely 3.5 p.c public holding, the inventory’s free float market cap could not attain the extent required to change into an index inventory shortly.

“An additional stake sale would improve the liquidity within the inventory and improve the chance of it attending to the foremost indices, which is welcome,” mentioned Srivastava.

Low free-float market capitalisation could act as a hurdle for LIC’s inclusion into main indices reminiscent of MSCI, FTSE, Nifty and Sensex.

“Firms are eligible for inclusion within the Nifty 50 supplied its common free-float market capitalisation is a minimum of 1.5 instances the typical free-float market capitalisation of the smallest constituent within the index,” mentioned Jasani of HDFC Securities. “As soon as that occurs and it’s included within the indices, passive funds could have no alternative however to purchase it within the respective weights of their portfolio.”

The truth that LIC is a pioneering large within the insurance coverage house, it would generate investor curiosity from the day one and Venkatraghavan of Equirus don’t see fund managers ready for it to change into an index inventory to be aware of it.

Disclaimer: The views and funding suggestions of funding consultants on Moneycontrol.com are their very own and never these of the web site or its administration. Moneycontrol.com advises customers to verify with licensed consultants earlier than taking any funding selections.

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