Life Insurance Corporation of India (LIC) shares have tanked 14 per cent from the IPO price of Rs 949, leading to losses even for its policyholders who were given a discount of up to Rs 60 per share during the initial public offering. Analysts at domestic brokerage firm Emkay Global Financial Services have a neutral outlook on the stock and see up to 8 per cent upside going forward. “LIC is an elephant that can’t dance,” they said, adding that the attractive valuation of the state-run insurer is more optical than fundamental. LIC stock was trading at Rs 809 apiece, down 0.15 per cent intraday on National Stock Exchange (NSE).
LIC stock rating: Hold
Target price: Rs 875; Upside: 8%
Emkay Global has initiated coverage on LIC stock with a “hold” rating with a price target of Rs 875 a share. The brokerage firm said its “neutral” view is underpinned by three factors including the low value of new business relative to embedded value; low annual premium equivalent growth and margin prospects ; and inherent volatility in the embedded value of the company. “While we appreciate LIC’s market-leading position and comfortable valuations, we prefer private sector peers that have better growth, profitability and therefore higher RoEV prospects,” it said.
Valuation attractiveness more optical than fundamental: According to the analysts, LIC’s valuation on price-to-embedded value appears cheaper when compared with listed private players; this is justified by the fact that LIC adds merely 1.0-1.5% of EV each year from VNB, as against around 8-11% in the case of private life insurers. “With a 65-year legacy (45 years as a monopoly), LIC’s intrinsic value resides almost entirely in existing EV; as such, the return on EV will essentially come from the unwinding of the discount and not from VNB addition. Thus, RoEV will likely be closer to the unwinding rate, pushing the fair value into the ~1x EV zone (assuming no negative surprises from the large back-book),” they said.
Dominant size hides operating challenges: Analysts believe that LIC’s dominant share in the single-premium group fund management business artificially inflates its market share and deflates some of its cost ratios. LIC’s commission and opex ratios are on the higher side vs. cost-efficient larger private players despite its massive scale, they further highlighted. “Adjusted for the group single-premium business and LIC’s almost ULIP less product mix, its persistency and surrender ratios are not impressive,” the report stated.
Valuation at 0.9 times its one-year forward P/EV
The brokerage has valued the life insurer at 0.9 times its one-year forward price-to-embedded value (P/EV). It has ignored any improvements in the embedded value from the future value of the new business. “The overall EV returns are going to be lower and a mature life insurance company like LIC, with a large back-book and limited new business strain, should be valued closer to EV,” Emkay Global said. The unwinding rate, or the rate at which future cash flows are discounted, could be higher than that of private sector peers because of a large portion of equity investment backing non-participant policyholders’ liabilities; this is bound to result in higher volatility in EV, potentially feeding into the share price., it further added.
Earlier, Macquarie analysts had initiated coverage of LIC stock with a ‘Neutral’ tag. However, despite the neutral tag, the international brokerage and research firm pinned a target price of Rs 1,000 per share on the stock, which is 14% above the listing price of Rs 872 per share and even above the IPO price of Rs 949. “We value the stock on an appraisal value method by using FY23E EV and a P/VNB multiple of 10x on FY24E VNB to arrive at a Rs 1,000 target price,” analysts had said in the report.
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