Market balance

lic IPO: Jefferies India says LIC IPO may upset market balance, calls it short-term risk

NEW DELHI: Jefferies India believes that Life Insurance Corporation’s upcoming initial public offering (IPO), considered the largest issuance ever in the country, has the potential to upset the market balance.

The insurance giant has filed a draft document for its share sale with the market regulator. The market awaits approval soon and public tenders will likely begin in mid-March. The government, which owns the entire stake in the company, is keen to complete the sale by the end of this fiscal year despite unfavorable markets.

“Strong overseas sales have been absorbed by strong domestic purchases, which has mitigated the impact on the market. The potential IPO of LIC (estimated at $5-7 billion) may upset this balance said Mahesh Nandurkar, an analyst at Jefferies, adding that this is therefore a short-term risk for the market.

Foreign investors have been bearish on India for a while now. In the current calendar year, they have withdrawn around Rs 52,500 crore from the shares, according to data available on NSDL. This is likely due to the surging dollar and declining liquidity globally.

“The abundant global liquidity scenario is already under threat as high inflation leads to policy reversals,” Jefferies said. “The US Fed will end its QE in March and our US economist estimates that seven 25 basis point rate hikes are likely in 2022, followed by four in 2023.”

Inflation has also increased in India, exceeding the tolerance level stipulated for the Reserve Bank of India. It is likely to rise further as the US dollar hovers around $100 a barrel. But the central bank has shown little inclination to raise interest rates or intensify monetary tightening.

The global broker said this position possibly puts the RBI behind the curve. But the central bank’s view could change very soon, she suggested.

“We note that effective policy rates have already moved 50 basis points above the repo rate of 3.35%. Nonetheless, the RBI’s continued pause on interest rates and the surprisingly low CPI forecast for FY23 has bought the RBI a few months of time,” Nandurkar said.

“The recent spike in crude oil, meanwhile, could lead to a rise of Rs 6-8/ltr in motor fuels, once the state elections are over in early March. These increases would add about 30 to 40 basis points to the CPI. A potentially higher CPI could cause RBI to change its dovish stance over the next 1-2 quarters,” he added.

India has imposed an unofficial embargo on fuel price hikes for the past two months as the ruling government does not want to influence soaring crude oil prices to ruin its chances of winning the election. Prices have not been revised in the last 110 days.

Another risk for the market is the prospect of “double” budget and current account deficits – simultaneously over the next 12 months. The center’s fiscal deficit target of 6.4% for FY23 has already raised concerns in the bond market.

“The surge in imports is quite broad-based and the recovery in local demand, together with high commodity prices, could keep the current account under pressure. We estimate the current account deficit at 2.5% of GDP for FY23 – a 10-year high,” Nandurkar said.

Clever target at 17,500

Jefferies believes that, despite a correction, India’s flagship indices are still expensive. The Nifty is trading at a 12m forward PE of 19.8x, 6.6% and 19% premium to the 5-year and 10-year averages, respectively. Even relative to regional markets, Indian valuations are 30 percentage points higher than historical levels, Jefferies added.

“We are looking at 10 mean reversion/higher rate scenarios to determine where the Nifty would be by December 22. The target is between 16,500 and 18,500 with an average of 17,500,” the broker said, taking into account the risks mentioned above.