Shares of LIC (Life Insurance Corporation of India) have got their first rating on Dalal Street as Macquarie analysts initiated coverage of the stock with a ‘Neutral’ tag. However, despite the neutral tag, Macquarie has 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. LIC, as expected, marked a discounted debut on Dalal Street. “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 said in the report.
Volatility can’t be dodged
In their report, analysts at Macquire seem to be concerned over the embedded value of LIC. “Inherent volatility in Embedded Value (EV) is another big challenge given a substantial portion of EV constitutes marked-to-market (MTM) unrealised equity gains,” the note said. They added that LIC’s September-2021 EV consists of almost 70% of equity MTM gains and hence sensitivity of EV to equity-market corrections is far higher than private-sector peers.
As explained by Macquarie, EV is highly susceptible to equity market movements. “A 10% fall in equity markets can erode EV for LIC by ~7%, much higher than private-sector peers, where the impact is around 1-2%,” they said. “Any investor who is taking an exposure to LIC stock is indirectly taking an exposure to equity markets and the inherent volatility that comes with it,” the report added.
Strong brand franchise but losing market share
While Macquarie analysts have voiced their concerns, they have also added that LIC’s brand and distribution franchise is unparalleled. Further, as highlighted by Macquarie, LIC has been losing market share consistently on the individual business over the last several years owing to a lack of diversified product portfolio and excessive focus on single premium and group business. “Even in FY22 it has lost further market share. Now regular individual business is essentially a high-margin business compared to doing large single premium or group business, in our view,” analysts added.
LIC is estimated to go aggressive in increasing the share of non-par in the overall product portfolio. Macquarie expects the same will go up to 13% by FY26 from 6% currently.
Inability to scale up non-par book, Par-book growth getting affected due to lower bonuses, Regular selling from the government can create an overhang, and a sharp fall in equity markets are some of the risks associated with the stock. “Since ~70% of the EV is equity MTM gains any sharp fall in equity markets could significantly erode EV,” the report said.