Domestic brokerage company Kotak Institutional Equities is bullish on Life Insurance Corporation of India (LIC), predicting a big upside of up to 44% from Monday's lows. The organization has been on the attention of investors since the central government approved compensation increases for LIC employees.
On Friday evening, the Centre approved a 17% salary increase for 1.10 lakh LIC staff ahead of Holi. The government approved a similar hike for public sector bank staff, and the LIC compensation revision would take effect on August 1, 2022, according to the state-owned insurance behemoth.
According to media estimates, LIC staff would have a 17 percent compensation increase beginning in August 2022. Kotak Institutional Equities said the impact on earnings is difficult to assess at this time. The annual wage bill will increase by Rs 4,000 crore. To put this in context, LIC reported total wage expenses of Rs 40,000 crore in FY2023 and Rs 25,800 crore in 9MFY24, the company stated.
LIC follows a five-year salary cycle. This means that wages are reviewed every five years. The most recent wage scale ran from August 2017 to August 2022. Wages were scheduled to be raised in August 2022.
"The corporation made a provision of Rs 2,100 crore in FY2023 for wage hikes. As such, assuming Rs 4,000 crore of total annual impact, it appears to have provided about Rs 2,000 crore," Kotak said.
LIC shares fell more than 2.35 percent to Rs 902.80 on Monday, with a market capitalization of more over Rs 5.75 lakh crore. The stock closed at Rs 924.84 on Friday. The stock reached 52-week highs of Rs 1,175 on February 9, 2024 and is now down almost 23% from those levels.
The brokerage predicts that LIC's shrinking personnel numbers lessens the impact of the annual pay expense over time. LIC had 1,08,987 employees in FY21, which decreased to 1,04,036 in FY22 and then to 98,463 in FY23. Notably, LIC's entire staff expenses, including arrears provisions, fell by 13% in 9MFY24, according to the report.
LIC is the largest insurance company in India. The company provides both participating and non-participating insurance products, such as unit-linked insurance, savings insurance, term insurance, health insurance, and annuity/pension products. The company went public in May 2022, raising more than Rs 21,000 crore through its IPO.
"We model personnel expenses at 7-8% of the net premium for LIC, but overall employee expenses are about 102-121 percent of PAT. This compares to a 3-9% ratio of personnel expenses to net premium for private players. Given its vast base, the impact on overall EV may be minimal," Kotak said.
Provisions for wake hikes in the last four quarters mitigate the one-time impact, and lowering staff force bodes good for long-term wage control. Meanwhile, business momentum appears to be holding strong, with the market value of stock investments up 5% since December 2023," it added with a buy rating and a fair value of 1,300, or a 44% increase.
