LIC IPO: Should you invest? 5 things that make the issue an interesting proposition

LIC IPO: The insurance behemoth has finally filed its Draft Red Herring Prospectus (DRHP) with SEBI. As the historic event of the LIC IPO is nearing, market interest in the issue has been increasing. LIC enjoys the leadership position in India’s sunrise sector and is likely to find a place amongst India’s most valued companies. 

LIC IPO: Should you invest?

LIC’s upcoming IPO, the latest IPO to become the talk of the town, is a crucial milestone for India’s life insurance sector.

Ventura Securities decodes why LIC stands out on the upcoming IPO calendar. "This might help you in deciding whether you should invest in the upcoming LIC IPO," says Ventura Securities in its report.

#1: LIC of India is the market leader in the life insurance sector

"If Xerox has been a synonym for photocopy, Colgate for toothpaste and Band-Aid for adhesive bandages, LIC has been no different for life insurance. That’s the extent of dominance of LIC in India’s life insurance sector. As on March 31, 2021 the total Assets Under Management (AUM) of the life insurance sector stood at Rs 44.80 lakh crore of which 76% has been with LIC of India," Ventura Securities.

#2: LIC has a unique business model

"Nearly 86% of premium underwritten by Indian life insurers in FY21 was from non-linked insurance policies and LIC has a 75% market share in this category," as per Ventura Securities.

"A clear indication here is that insurance buyers aren’t willing to take market risk while investing in an insurance policy. Since non-linked plans have no “market component” they are more stable and don’t expose LIC’s business to the risk of market seasonality/cycles. However, non-linked life insurance still remains a push product; i.e., an active relationship with a customer is paramount for garnering sales," Ventura Securities added.

#3: Huge branch network and presence in the rural and semi-urban clusters

"Insurance companies in India had 11,060 branches in FY21, of these 45% belonged to LIC alone," says Ventura Securities.

"More importantly, due to its prominent presence in Tier-III, Tier-IV cities, LIC appears to be in a sweet spot to capitalize on the growth opportunities in semi-urban and rural areas. Tier-I towns are those with a population of more than 1 lakh while Tier-4 towns are those with a population of 10,000 to 19,999. (IRDA definition)

These clusters must contribute significantly in the overall growth of India’s life insurance industry, if the story of India’s favourable demographics has to play out for the sector."

#4: An enviable agent base

"The life insurance industry in India had an agent strength of 24.55 lakh as on March 31, 2021. Here too, LIC dominates. On the same day, LIC had a large pool of 13.5 lakh insurance agents spread across the country, of which 80% were active. LIC derives 94% of new business in the individual category form individual agents. No wonder, we see TV commercials appealing to individuals to become their own boss (Read: insurance agents). On the other hand, private insurers predominantly depend on corporate agents such as banks. Corporate agents account for nearly 58% of new business in the individual category," says Ventura Securities.

#5: Emergence of the phygital theme

"Although digitalization trends are catching up fast, their contribution to the growth of the life insurance business is still miniscule. Direct sales channels contribute just about 1.1% in the new business collection, as far as LIC is concerned. For private insurers, nearly 13% of sales comes from the direct sales category, which remains a crucial data point to track going forward, especially considering the internet explosion. LIC has been embracing technology to augment customer convenience and digitally equip its agents and other channel partners with the aim of offering them ease of doing business," as per Ventura Securities.

"If the growth of India’s life insurance sector unfolds as envisaged in this decade, it might reward early investors. The years of experience of LIC in risk underwriting and managing a large AUM promise to offer it an edge over other insurers. Its unique business model supported by phygital strategies could be another positive," Ventura Securities concluded.

(Disclaimer: The views/suggestions/advices expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)