WHY LIC's embedded value set at over Rs 5 lakh crore: Govt official ?

NEW DELHI - State-run Life Insurance Corporation of India's (LIC) embedded value has been finalised at more than Rs 5 trillion ($66.82 billion), a government official who is overseeing what is expected to be the country's largest IPO said on Thursday. LIC is likely to sell its entire stake to IDBI Bank in 2022/23, the official told Reuters. Investors are eagerly waiting for the government to indicate LIC's embedded value - a measure of future cash flows in life insurance company and the key financial gauge for insurers - when it releases the initial public offering (IPO) draft prospectus, expected in a matter of days. While there has been speculation about the number in Indian media - from as low as $53 billion to as high as $150 billion - this is the first time the government, which owns 100% of LIC, is commenting on the matter. The embedded value will help establish the market valuation of LIC and determine how much money the government raises in the flotation. That will be crucial to the government to help meet its divestment targets and keep its fiscal deficit in check. "I would say the embedded value could be more than 5 trillion rupees and the enterprise value will be multiples of that," Tuhin Kanta Pandey, secretary, department of divestment, told Reuters in an interview Media reports in India have projected LIC's market valuation at around four times the embedded value. LIC has a majority share of the life insurance market in India. The government, which hopes to raise as much as $12 billion from selling a stake in the IPO, expects the proceeds will help it bridge a deficit gap this fiscal year. Pandey said the government planned to issue a draft IPO prospectus to investors as early as next week. he embedded value will help establish the market valuation of LIC and determine how much money the government raises in the flotation. The Narendra Modi government expects far larger inflows from the initial public offer (IPO) of Life Insurance Corporation (LIC) than what it has budgeted for in 2021-22, Economic Affairs Secretary Ajay Seth has said. Seth said the government is confident that the LIC IPO will be done before March 2022. “Though the size of the issue has not been decided yet, but yes, there should be far larger inflows on that account,” he said. The comments come two days after the Union Budget 2022-23 revised the disinvestment target for FY 22 downwards to Rs 78,000 crore from the budgeted estimate of Rs 1.75 lakh crore. For FY23, the target has been pegged even lower at Rs 65,000 crore. So far, the government has managed to raise Rs 12,029 crore in FY22 from the disinvestment of minority stake in some public sector firms and by privatising Air India. The assumption is that the rest — around Rs 66,000 crore — will be brought in through LIC IPO. Seth said one of the reasons why the disinvestment target has been kept low for next fiscal is that the government does want to disturb the fiscal maths, and wants to strictly adhere to the fiscal deficit target of 6.4 per cent for The Budget revised the current financial year fiscal deficit target to 6.9 per cent from the earlier pegged target of 6.8 per cent, showing a marginal deviation. Also read: Budget lays foundation for growth in next 25 years, says Niti Aayog VC Economic Survey, Budget assume different real GDP in FY23 Keeping its targets conservative, the Narendra Modi government has assumed a real GDP growth rate of around 7.5 per cent for 2022-23, lower than Economic Survey projections of 8-8.5 per cent and far distant from projections of the International Monetary Fund (IMF). In its World Economic Outlook released in January, the IMF estimated India GDP to grow at 9 per cent in the next financial year. “I will put it (real GDP growth) close to 7.5 per cent. So, we see that whatever we put in has an upside potential. Even for nominal GDP growth, we see an upside potential,” Seth said. The nominal GDP growth is estimated at 11.1 per cent for 2022-23. By Seth calculations, since the real GDP growth is assumed at 7.5 per cent, the deflator, which constitutes wholesale prices mostly, is assumed between 3.6-4 per cent. Seth said the deflator is assumed lower this year since this will be calculated over a high base of last year and he expects that global commodity prices will ease going forward as the pandemic ebbs. Also read: LIC IPO draft prospectus, final regulatory approval aimed for next week Confident of meeting capex targets On the issue of whether the Centre has enough capacity to spend on capital creation, Seth said this year, a lot of heavy lifting will also be done by state governments. “States have a tremendous capacity and good set of projects to invest in, which will give a growth impetus. So, this time, the financing is coming from the Centre, but in terms of the spending part, a fair amount of this will be taken by the state governments,” he said. Thus, Seth said, he is confident that the capital expenditure targets will be met in 2022-23. “If you look at the capital spending in the first quarter of the current year, it was a tough time because of the pandemic. I don't see, in the short-term of 2022-23, this being a major challenge,” he said. The government has kept a record target for capital expenditure at Rs sevan lakh crore for FY 23, almost a fifth of the total spending in the Budget. This is 35.4 per cent more than last year target of Rs 5.5 lakh crore. Out of this, Rs 1 lakh crore will be given to states as 50-year interest-free loans for capital spending, up from Rs 10,000 crore limit given in the current financial year. FY23 borrowing will be lower than projected The borrowing that the government will do from the bond market to fund its fiscal deficit will be lower than what is projected in the Budget, the economic affairs secretary said. The rationale behind this assumption is that the government has kept a lower amount of money to flow into small savings in comparison to last year. However, if the small savings collections are better than projected, the borrowing will go down to that extent. “We have kept the target for using small savings of Rs 4.25 lakh crore to finance the Budget deficit. Now that is kept on a premise that investors will find newer avenues to invest in next year. The number will be certainly lower than what is projected,” he said. In the current financial year, the government is financing a third of its fiscal deficit through small savings collections. While in 2021-22, it is using Rs 5.9 lakh crore to fund the deficit from small savings, in 2022-23, it is estimated to use Rs 4.25 lakh crore. The fiscal deficit for 2021-22 has been revised to Rs 15.9 lakh crore (6.9 per cent of the GDP). For 2022-23, it has been pegged at Rs 16.6 lakh crore (6.4 per cent).