LIC IPO: Embedded value set at over 5 trillion rupees, enterprise value in multiples, says DIPAM Secretary Tuhin Kanta Pandey

The embedded value of the state-run Life Insurance Corporation of India (LIC) has been set at over 5 trillion rupees (USD 66.82 billion), said a government official, who is overseeing what is expected to be the country`s largest IPO, on Thursday, as per Reuters report.

According to Reuters, investors are anxiously waiting for the government to disclosure LIC's embedded value - a measure of future cash flows in life insurance companies and a critical financial metric for insurers - when the IPO draught prospectus is released, which is likely in a couple of days.

While there has been conjecture in Indian media about the figure ranging from $53 billion to $150 billion, this is the first time the government, which owns 100% of LIC, has responded.

The embedded value will be used to estimate the market value of LIC and how much money the government raises in the flotation. This will be critical for the government to accomplish its divestment goals and keep the budget deficit under control, as per Reuters mentioned.

"I would say the embedded value could be more than 5 trillion rupees and the enterprise value will be multiples of that," Tuhin Kanta Pandey, secretary, department of divestment, told Reuters in an interview.

According to Indian media sources, LIC's market value is about four times its embedded value.

In India, LIC controls the majority of the life insurance industry. The government anticipates the earnings from selling a part in the IPO, which may raise up to $12 billion, to help it close a budget gap this fiscal year, Reuters reported.

According to Pandey, the government intends to send out a draught IPO prospectus to investors as soon as next week.

PUSH TO PRIVATISATION

The administration of Prime Minister Narendra Modi reduced its divestment aim for the fiscal year ending in March from 1.75 trillion rupees to 780 billion rupees ($10.43 billion).

It expects LIC's initial public offering to help it accomplish its amended goal.

According to Reuters, it has raised over 120 billion rupees so far by selling stakes in other companies. According to government and banking sources, selling 5% of LIC's shares to acquire that much would be ideal, but the government was even ready to sell as much as 10%.

Pandey, on the other hand, refused to say how much of the government's stock will be sold in the first round.

He claimed that, following the successful sale of national carrier Air India, the LIC's listing will be a huge event for markets, aimed at attracting individual investors and forming public opinion on the privatisation.

"It is the LIC moment for Indian markets and it will add depth," he said noting that it could help attract more investors to invest in state-run companies.

With its listing, LIC might join the ranks of Reliance Industries, TCS, and HDFC Bank as one of the top five largest companies in terms of market capitalization, as Reuters mentioned.

According to Pandey, LIC is unlikely to issue new shares in the main market and would instead sell the whole supply in the secondary market.

"I don`t see any need for capital for LIC, it is sufficiently capitalised," he said, adding LIC could sell its stake in IDBI Bank in the next fiscal year.

The government will hold the bulk of its stake in the LIC under current plans.

According to Reuters, the holding cannot go below 51 percent by law, and that will be preserved, he said, adding that it would not be able to sell more than 25 percent of its LIC stake in the next five years.