Traveling in Indian local trains has to be one of the best experiences. I say this despite all the hurdles because I believe Indian trains are the literal version of social media apps.
You meet people, talk to them like you know each other well, and bam! Chances are you will never meet that person again.
Local trains allow you to meet different types of people. From deeply inspiring to downright annoying, you get to know all kinds.
The last time I was on a trip, an uncle in our compartment kept talking about himself and ignored the whole conversation. However, it was quite urgent as he made it up with his interesting stories.
Of all the stories he said, one particularly stuck with me. We were all talking about the importance of financial savings and planning for the future when he claimed that,
“Every month our family pays a premium of Rs 2 lakh. I told my son whether or not you do other savings but you should get a LIC. I think everyone should get a LIC.”
He meant life insurance, but LIC is so popular that he kept calling it ‘LIC’. It’s like Colgate for toothpaste or Xerox for any photocopy.
Because it was the most popular insurance brand, the hype surrounding LIC’s IPO was expected. But all its hype went right out the window the moment it was mentioned. A share with a subscription price of Rs 902-949 was listed at Rs 875!
Of the newly listed companies in 2022 in Asia, LIC is ranked second in losing the most market value, according to Bloomberg.
Shares of the PSU company have hit lows every day!
Let’s take a look at the likely reasons why the LIC share price is falling:
#1 Competition from private sector players
Life Insurance Corp (LIC) has been around for over 60 years. It has taken a leading position in the market. Until shortly.
It seems the wind has changed. People are switching from LIC to private insurers like HDFC Life, ICICI Prudential, Max Life, etc.
In the past two years, LIC has lost 8 percent of its market share to private life insurers. On a CAGR basis, private life growth over the past two years was 10.2 percent for private life insurers, while LIC’s RWRP fell 6.6 percent.
The life insurance industry was already under pressure from the Covid-19 wave. An increasing number of claims put financial pressure on insurance companies. But even as the covid-19 wave receded, LIC growth remained sluggish.
Looking at persistence ratios, LIC has the lowest at 78.8 percent against the industry average of 85.1 percent.
The persistence ratio is the number of total policies an insurer has to the policies that have been renewed or are in effect. It means that a smaller number of policyholders choose to renew their policy purchased from LIC.
LIC is gradually and consistently losing its grip on the market.
#2 Orthodox business model
Remember the time when Nokia was the best-selling mobile phone company?
But then it made the mistake of denying Android, and it almost disappeared from the market as Android revolutionized the mobile industry.
Likewise, the market fears that LIC will suffer the same fate as it is reluctant to deal with the changing business models of the insurance industry.
Private players such as HDFC Life and SBI Life have used their existing businesses and group synergies to boost their insurance business. They have linked products from both companies to boost sales of the insurance business.
As a result, 50 percent of the insurance industry comes from banks. Despite the opportunity to use PSU banks as a channel, LIC has stuck to selling insurance through its agents.
More than 90 percent of LIC’s total premium comes from its agents.
Digital ways of doing business have plunged into traditional ways of doing business. LIC colleagues make good use of online business tools, while LIC continues to use traditional means.
As more and more people start buying insurance online, LIC loses business because it cannot provide such buyers with the right resources.
#3 Government Control
PSUs have a bad reputation with investors, even those who make a profit. Some PSUs operate in a monopoly industry and have good financial records and investors still avoid them due to government control.
Also from a valuation perspective, PSUs often trade at cheap valuations and are considered undervalued stocks. And there’s a good reason why investors still avoid them.
Also, many PSUs are cyclical stocks. For example, stocks like NMDC are more of a trading bet and not an investment. This is due to fluctuations and volatility in earnings and the share price.
Now LIC is a PSU with a government of India owning 96.5 percent of the total equity.
Just as public sector banks have to cancel loans because of government regulations, LIC has to make bad investments because of the government.
When the government needs money to fund public institutions, the government turns to LIC. As a result, LIC today has a huge investment in the public sector companies.
Also, a study shows that the bigger the IPOs are, the harder they fall. LIC was the largest IPO ever in India.
Takeaway investments…
Have you ever been fooled by a good looking dish? I sure have.
A dish that looks so exquisite and delicious that you just have to order it. But later, when you taste it, you gag…
LIC’s mega IPO looks exactly like this.
The IPO looked irresistible due to its dominant corporate share and public reputation. But if one took a closer look at the affairs of LIC, he/she would start to see problems.
Investing in a company with great growth prospects makes sense because as the company grows, the share price will also rise. But when you enter the markets after ruling the market for 66 years, you wonder if the company has come of age yet.
There can be conflicting views on this as the life insurance business will never go out of reach, especially considering that India could take over the entire population of China.
LIC may be losing market share, but there’s no denying that it rules the market with over 50 percent of the market share. If it adopts modern business methods, it can make it difficult for its competitors.
Will it adapt to new business assets? Will he be able to get his share back from the private players? Look at that…
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
This article is from Equitymaster.com.
(This story was not edited by DailyExpertNews staff and was generated automatically from a syndicated feed.)