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Home » Popular Markets » Equities » Life Insurance Corporation of India: have the fundamentals jinxed this mega IPO?

Shares in Life Insurance Corporation of India [NSE:LICI], India’s state-run insurer, which IPOed earlier this week, continue to do less well than expected as inflationary pressures rise in India. Shares are trading at 867 rupees, down 8.7% from the IPO price of 949 rupees.

The listing was fairly historic – the largest ever in India and the fifth largest listing globally this year, despite the fact that only 3.5% of the total stock of this state behemoth was on offer.

Nearly three times oversubscribed

In the run-up to the listing on the National Stock Exchange in Mumbai this Tuesday the offering was nearly three times oversubscribed, attracting both domestic retail buyers and big foreign investors such as Singapore’s and Norway’s national wealth funds.

State-owned Life Insurance of India is a big name at home which holds two thirds of the country’s insurance market. There are other smaller and more nimble insurers out there but because of its well-established brand, LICI was an easy sell to retail investors who flocked to the IPO and made twice as many offers as there were shares available. Part of the appeal was that they were offered a 45 rupee discount on the nominal price, and those holding insurance policies with LICI were offered a 60 rupee discount.

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However, this was wiped out on the first day of trading after the stock fell 7.8%. The lower prices will be a blow for the state, hoping to raise much more than the 2.7 billion rupees in order to fill a gap in the budget. With only 3.5% of the total stock being sold this values the company at 78 billion rupees, a far cry from some of the early valuations which quoted a figure of 17 trillion for the company.

India’s economic backdrop could be a factor

In theory, the timing of the IPO should have worked in favour of strong stock performance. Despite grappling with Covid, a large number of deaths and insufficient vaccines over the last two years, India still managed to be the fastest-growing major economy, in terms of economic growth it was doing significantly better than China.

The IMF said earlier this year it expects India’s economy to expand by 8.2% in 2022, almost double that of China’s 4.4%. India’s growth is far more dynamic than Europe’s forecast growth of around 3.7% and an even weaker 2.3% growth in the US. The country’s stock markets have reflected that upswing. Last year one of India’s benchmark indexes BSE Sensex finished 21.3% higher on the year, compared with the FTSE which rallied by 14.3%.

But the arm of the Ukrainian war is long and its economic consequences in the shape of higher fuel and food prices are being felt in India too. Inflation has risen to its highest level since 2014 and consequently, at the start of May, the country’s central bank raised interest rates for the first time in four years. Also, the second wave of Covid has been particularly vicious causing around 400,000 infections only about two weeks ago. These numbers are now luckily beginning to slide and infections in Mumbai are down to about one-eighth of their peak.

Some analysts also noted that being a very traditional and state-owned insurer LICI has less room for growth in the type of high-margin insurance products that some of its smaller competitors are offering. This is making it likely to be a steady, hold-for-the-long-term type of stock rather than one offering fast growth.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Vanya Dragomanovic

Vanya Dragomanovich

Vanya is an award-winning financial journalist who has worked in both television and newswires. She spent over 10 years at Dow Jones covering commodity markets, including metals, coffee, cocoa and oil. She also reported from the floor of the London Metals Exchange, and appeared on CNBC to discuss international metals markets. Since then she has written for several leading financial publications, including serving as commodities editor for FTSE Global Markets.

Vanya continues to cover international commodities markets globally, specialising in particular on metals and alternative energy. She is also the author of a book on CFD trading.

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