Good Morning Toasters!

Hey friends!! Hope you’re recovering from what was a memorable day in Indian capital markets history 😒😞

The RBI Governor pulled a sneaky one, calling an impromptu press conference to announce an unexpected rate hike of 40 Bps; in his words, the situation is dynamic and fast-changing and requires actions in equal measures 🤷🏼

In other news (not so big 😂), LIC launched India’s largest ever IPO, cutting its issue size and valuations in order to push through its agenda on dis-investment and get the ball rolling under a relatively sketchy market scenario.

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Market Watch

Nifty 50: 17,677.60 | -391.50 (-2.29%)
FII Net Sold: INR 3,288.18 crore

Sensex: 55,669.03 | -1,306.96 (-2.29%)
DII Net Bought: INR 1,338.00 crore

IPO News

We conducted a detailed webinar on the Insurance Industry and LIC’s IPO with industry stalwarts like Kumar Saurabh & Peeyush Chitlangia. Click here to access the recording.

LIC IPO – a behemoth comes to the markets; what’s up and what do you need to know?

• LIC’s Sanskrit tagline, taken from the holy Gita, translates to ‘I carry the responsibility of your well-being, and with ~INR 10 of every INR 100 saved by the Indian household reaching LIC, India’s OG Life Insurer is well & truly responsible for ‘your well-being’
• A behemoth in every sense of the word, the Life Insurance Corporation of India (LIC) is the largest and oldest insurer in the country, accounting for ~43% market share (albeit decreasing), and a customer base of ~280 Mn policies, which roughly translates to one per family in India
• From an equity ownership perspective (LIC Premiums are invested in public market equities), the insurer is the largest institutional investor in India, with assets under management (AUM) of USD 130 Bn, which translates to a 4% stake in Indian equities (wild)
• Initially scheduled to raise a whopping INR 650 Bn (USD 8.6 Bn) by selling a 5% stake (all offered for sale, no proceeds going to the company) at a USD 172 Bn valuation, pesky market conditions (inflation, war) and poor business economics have forced the GoI to reduce size & valuation to get the IPO going, to meet its pre-set disinvestment targets (thanks Nirmala 🤑)

Damn!! That’s huge! Share some details? (Yoo are you sure?? 😜)

Distribution & Customer Acquisition

• Government-owned LIC has primarily distributed policies and acquired customers through an agency-led model, with >90% of business coming through its plethora of individual agents, who cover a large % of the country pin-codes (we all have a LIC agent, don’t we 🤭)
• This is in stark contrast to private insurers, who have acquired customers via a mixture of Bancassurance (distribution through bank branches), and agency driven (agents + corporates), resulting in stronger growth (more on this below)

Product Portfolio, Market Share, Industry Dynamics

• While LIC has a lion’s share of the industry, this % has been on a steady decline (see image below), with private peers outpacing the elephant through a mix of better distribution and improved product portfolio
• The company’s focus on Participating Policies (definitions included below), low ticket size mass customer base, and non-build-out of popular Unit Linked Insurance Plans (ULIP), has resulted in a steady decline in market share since private peers were allowed to operate in the industry in 2000
• ULIPs now form ~20% of the Insurance industry’s new business in terms of Weighted Received Premiums (WRPs) in FY21, while LIC’s focus remains on Participating / Non-Participating Policies (Par / Non-Par), with ULIPs contributing <1% to new business
• Given changing customer profile, with new-age policyholders looking for returns from policies (in addition to insurance payout at end of term), the lack of cohesive buildout of ULIP products has resulted in decreasing market share for LIC

Interesting! IPO Details? Valuations? And final thoughts?

IPO Details

• The issue opened for subscription on May 4, ends on May 9, and unusually enough will be open for application on Saturday, May 7 as well with GoI citing the large issue size as a reason for extended hours (guess it’s a relief the same wasn’t afforded to Paytm 🤭)
• The issue size has been cut by a 1/3rd, with high valuations, choppy market conditions and not-so-favourable business dynamics leading to less demand for the company
• Even at a reduced issue size of INR 21,000 crore, the IPO is the largest ever in the Indian markets, with GoI expected to offload 3.5% of its equity stake; retail investors are earmarked 35% of the issue, and have been given a discount of INR 45, while LIC Policyholders will be eligible for INR 60 discount

Valuations & Final thoughts

• With a trimmed issue size and valuation, LIC’s issue has a different flavour vs when they were poised to launch in Jan’21; at the higher end of the price band (INR 949), the company is valued at 1.1x P / Embedded Value per Share, which is a stark discount to listed private peers, who trade between 2.2 – 3.5x
• LIC is the elephant in the room, with a product portfolio that hasn’t been upgraded and a distribution model that seems dated when compared to peers
• The company’s ethos has been built over decades, and it’s unlikely that will change in the near term, and yet there is a Bharat the insurer will continue to serve through its primary savings led product via an agency driven model
• The IPO is a structural positive for the sector overall, given its reach, size & scale, which might lead to higher awareness and increase penetration

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Around the World 🌎

• Good time for Airbnb – Revenues for Airbnb climbed 70% last quarter (at $1.5 billion vs $1.45 billion expected) and the company is ready to post its first full-year net profit this year as demand for suburban rentals continued strongly in spite of higher rates. Gross bookings (the total value of bookings made on its platform) grew 67% to a record $17.2 billion. Strong demand for summer has put expectations of second quarter revenue between $2.03 billion and $2.13 billion. Shares rose 5% after hours post announcement of results
• Not the best time for Lyft – Operating profit at Lyft may take a hit as the company is looking to invest heavily in the current quarter to increase driver supply and grow the platform. The forecasted adjusted earnings stand between $10 million to $20 million for the quarter missing expectations by > $50 million. Some costs, like driver incentives, will be passed on to consumers as higher prices but others could definitely weigh on the company’s profitability. Shares fell 2.4% on Tuesday and retreated 26% in late trading after it issued the outlook
• Meta and e-comm, not a match? – Meta’s e-commerce division which it rolled out in 2020 remains well below the mark as it lacks basic features like the ability to often display products in different colours and sizes, limit where a merchant can ship items and provide next-day or same-day deliveries among others. The only silver lining is the large audience base that the platform provides. But they don’t have any choice – Apple’s new privacy laws are affecting its ad business and developing channels of commerce within its own app will allow them to retain the much prized data. The company’s shares have dropped 34% since February of this year

Economy News

RBI’s off-policy meeting had some major takeaways; what’s up and what do you need to know?

• In a surprise move, the main OG aka the RBI governor called an unscheduled MPC and voted to raise the repo rate (interest rate charged by RBI from banks) by 40 bps to 4.4% which had been unchanged since May’20
• The stance continues to remain accommodative (i.e it prioritises growth over inflation) but the focus is gradually shifting toward withdrawing accommodation
• Inflation in March had exceeded the upper limit set by the RBI (at 6%), and the following two quarters look no different with April clocking in at 7.25%
• Once word got out of the press conference, mid-day yesterday, the markets were spooked, eventually closing down >2% for the day

Tell us more!

• The Cash Reserve Ratio (CRR) was also increased by 50 bps sucking out over  Rs870bn in banking liquidity (more such moves are expected in the future)
• Major reasons for this surprise move were quoted to be ‘rising inflation, geopolitical tensions, high crude oil prices and shortage of commodities globally, which have impacted Indian economy’ by Mr.Das himself
• It also comes ahead of a widely-expected 50 basis points hike by US Federal Reserve later on Wednesday

Damnnn okay what’s next?

• MPC may raise rates by another 25 bps in June as inflation continues to plague with food inflation expected to remain high (due to spillovers from global wheat shortages, and a rise in edible oil prices due to the war)
• A huge bond supply in FY23 will need the RBI’s invisible hand (through OMOs) especially as the BoP deficit could soar to $50bn in FY23
• FY23 could see overall policy rates go up by 125-150 bps and a *mild bear-flattening bias in the Gsec curve* may prevail

What else caught our eye? 👀

Govt offering a truce to the states

• The Centre will offer to subsume a part of the levy on sin goods like aerated drinks, cigarettes and cars after March 2026
• States will get half the proceeds as SGST in addition to getting 41% of the Centre’s GST collections – an arrangement that would lead to higher revenue compared to the compensation programme
• States have been demanding that the Centre compensate them for their revenue loss and are worried about their financial position once the compensation period ends in June this year

Titan may need some help

• Titan company reported its standalone profit for the last quarter at Rs. 491 Cr (down 7.18% YoY from Rs. 529 Cr) with revenue falling by 3.46% in the same period
• Major blame can be placed on partial lockdowns, volatility in the gold prices and uncertain geopolitical conditions
• The jewellery segment saw a drop of 4% in revenue however the watches and wearables business increased 12% while the eyecare business increased 6% YoY

Results Preview (Nifty 200)

Thursday, 5th May: Cholamandalam Investment & Finance Company, Dabur India, Indus Tower, Exide Industries, Marico, TVS Motors, Voltas, Adani Transmission, Sona BLW Precision Forgings

Friday, 6th May: Canara Bank, Federal Bank, Reliance Industries, Tata Power Company

Educational Topic of the day

What is the rule of 72?

The rule of 72 is a straightforward calculation that determines how quickly your money will double at a given rate of return. To calculate the number of years it will take for your investment to double, divide 72 by your yearly compound interest rate.

Edited by Raunak Karwa

Let’s connect, I always love hearing from you. Hit me up at Raunak_Karwa on Twitter or Raunak.karwa@finlearnacademy.com