Corporate Development     

Published: Feb 28, 2023
Updated: Feb 28, 2023

LIC of India

Adani worsens LIC stock slide

Surprisingly, in LIC stock, mutual funds, banks and foreign portfolio investors hold a minuscule 0.66%, 0.11% and 0.17% respectively. This does signify loud and clear that bigticket market players in general have largely opted to keep away from the stock so far.

Despite reporting a higher profit after tax of Rs 22,970 crore for the nine months ended December 31, 2022 vis-à-vis Rs 1,672 crore in the corresponding period of the previous year, the LIC stock price touched an all-time low at Rs 566 on February 27, 2023 before settling at Rs 569.75. Of course, the rise in profit was mainly due to the transfer of an amount of Rs 19,941.60 crore (net of tax) pertaining to accretions on the available solvency margin from non-par to shareholders’ account.

The government had divested its 3.5% stake in LIC to the public at three different issue prices — Rs 889 to policy holders, Rs 904 to its employees and retail investors, and Rs 949 to HNIs. Surprisingly, ever since the stock listed on the bourses on May 17, 2022, the price hardly touched its issue price of Rs 949 but couldn’t sustain at that level. It would be appropriate to say that the public shareholders from all categories, holding as on date since the IPO, are incurring a notional loss.

Considering the current price of Rs 567 against its nominal issue price of Rs. 904 per share, that results in a loss of Rs 337 per share which translates into 37.28%. Gradually, the stock has started losing its flavour amongst investors, which of course is a matter of concern. A majority of investors have either booked losses or are in a notional loss mode.

The current trend is more disturbing now that its investment in the Adanis is being talked about at length. As we all know, New York-based short seller Hindenburg Research published its report on the Adani group on January 24, 2023, accusing the group of stock manipulation and accounting fraud over decades. LIC’s market price on that day (24/1/23) was Rs 702.20 and its closing price on 27/2/23 was Rs 567.75 – a notional price erosion of Rs 134.45 (19.15%), with a negative outlook and fear of uncertainty going forward. This incident has disappointed individual investors who would prefer to keep away from the counter till the dust settles.

It’s worth mentioning that of the 3.50% public holding, 33,85,095 individuals hold a 2.01% stake in LIC, which includes 20,811 non-resident Indians (0.09%). However, surprisingly, mutual funds, banks and foreign portfolio investors hold a minuscule 0.66%, 0.11% and 0.17% respectively. This does signify loud and clear that big-ticket market players in general have largely opted to keep away from the stock so far.

BEHIND DEBACLE

This price debacle could be broadly attributed to three major reasons. One, a faulty and unrealistic price discovery by the investment bankers and the government’s concurrence, secondly, the current lacklustre market sentiment and thirdly, and more disturbing to investors, the negativity and concern over LIC’s investment exposure of Rs 36,475 crore in the Adani group, of which the equity component is Rs 30,127 crore. As per LIC’s submission, the market value of its equity investments on Jan 27, 2023 was Rs 56,142 crore – that is, it was making a notional profit of Rs 26,015 crore. However, thereafter, since the last few weeks the market price of most of the Adani group stocks have gone down further and some of them are even witnessing a free fall to lower circuits. Without exaggeration, one could conclude that considering a further erosion in stock prices, LIC’s huge equity investment of Rs 30,127 crore in the Adanis could either be at par or has started its notional loss-making journey. But it is certain that the price movement will largely be linked with the new developments taking place in the Adani group.

Undoubtedly, LIC is a 66-year-old premier institution of high repute and has contributed in an unparalleled way to the eco-socio development of our country. Moreover, it continues enjoying a numero uno status in the life insurance business and in the Indian capital market as the single largest investor. However, as now it is a listed entity, its management owes greater responsibility, accountability and transparency towards its stakeholders and is also expected to act totally fearlessly, independently and in the best interest of the Corporation with tremendous diligence. They need to remember that they are trustees who have been entrusted with the herculean task of managing assets under management (AUM) worth Rs 45 lakh crore.

The LIC management, while justifying their exposure to the Adani group in terms of equity investment and debt instruments, have explained that LIC’s exposure in the Adani group on January 30, 2023 is 0.975% of LIC’s total AUM at book value. They have added that debt securities held by LIC are of AA rating and above, which is in compliance with IRDAI investment regulations as applicable to all life insurance companies. However, it is important to point out that certain acts might not be wrong legally but incorrect ethically and morally. This applies to their all investment decisions, not just those confined to the Adanis.

TRUST FACTOR

LIC is not only a giant but it is a lion of the life insurance business and the pride of the nation, having huge intrinsic values and unharnessed potential to accelerate its pace of growth with a sizeable improvement in profitability. However, much of its all-round success from here on, in an aggressive and competitive era, will largely bank on its core management team’s level of integrity, courage to say ‘no’ and ability to withstand any external/internal pressure or challenges. Only then can we expect LIC to keep its numero uno status in the true sense and take itself to new heights, and simultaneously enjoy the loyalty of public shareholders.

It is important to point out that certain acts might not be wrong legally but incorrect ethically and morally. This applies to LIC’s all investment decisions, not just those confined to the Adanis.