Analysts expect shares of Life Insurance Corporation of India (LIC), the country's largest life insurer, to gain more than 50% from present levels due to a growing market cap discount to embedded value (EV).
The share price of LIC has dropped more than 10% year to date (YTD), while the stock has dropped more than 5% in the last year. However, LIC shares are still selling at a discount of more than 35% to the issue price.
Based on a 0.8x FY25E EV of 7.5 trillion, ICICI Securities maintained a 'Buy' rating on the company. It has a target price of $917 per share, representing a 51% increase over Wednesday's closing price. The target price is 5.7% higher than the LIC IPO listing price, although it is still less than the issuance price.
Following substantial investor interest in its 21,000-crore IPO, LIC shares were listed on the BSE on May 17, 2022, at 867.20, a reduction of 8.62% to the issue price of 949 per share.
LIC's market value was roughly 5.48 lakh crore at the time of IPO, making it India's fifth most valuable firm. The company's worth has dropped by more than 1.6 lakh crore to 3.85 lakh crore.
In the September quarter of FY24, LIC reported a 50% YoY loss in standalone profit to 7,925 crore, owing to a drop in premium income. In the previous quarter, the insurance behemoth earned Rs 15,952 crore in net profit.
In Q2FY24, LIC's net premium income fell 18.7% year on year to 1.07 lakh crore from 1.32 lakh crore.
The value of new business (VNB) for H1FY24 fell to 3,304 crore from 3,677 crore in the previous fiscal year's similar quarter. For the same time period, the net VNB margin remained constant at 14.6%.
ICICI Securities believes that LIC is making the correct measures to increase VNB by shifting its product mix to non-participating products and expanding non-agency distribution channels.
However, a reduction in group business, inconsistent outcomes in persistence, and competitive repricing in key areas to capture market share have resulted in a 10% year-on-year decline in VNB in H1FY24.
Going forward, the brokerage anticipates that some of these will improve in H2FY24 (particularly group volumes), while high investment returns will continue to support embedded value (EV) development.
"We have always believed that a product mix-driven possible increase in VNB margin (with the goal of approaching private peer levels within the next 3-4 years) is achievable and underappreciated by the market." Furthermore, the tailwinds of investment returns are not included in the current deep discount valuation (selling close to 0.5x FY25E EV)," according to ICICI Securities.
For FY24 and FY25, it anticipates a -7% and +10% change in APE, a VNB margin of 14% and 16%, and an unwinding of 8%. It also anticipates core RoEV to be 9.3% in FY24 and FY25, down from 11% in FY23.
The group's commercial recovery and ongoing tailwinds in investment returns should lead to a positive surprise in H2FY24. Margin improvement will be aided by increased volume. According to ICICI Securities, total RoEV for FY24 and FY25 is predicted to be higher due to favourable economic variations of 18.5% and 9.1%, respectively.
At 1:20 p.m., LIC shares were trading 0.51% higher on the BSE, at 610.00 per share.
