IPO-bound LIC's FY21 profit picture not so pretty compared to size

FY21 profit of Rs 4,579 cr would make it 34th most profitable listed firm

The Life Insurance Corporation (LIC) will be the country’s largest company in terms of revenue and assets when it lists on the stock exchanges, but it will count as a mid-size company in terms of profit and net worth.

The insurance behemoth reported revenues of around Rs 7.04 trillion in FY21, nearly 40 per cent more than those of Reliance Industries Ltd (RIL), which topped the charts in the listed space with Rs 5.05 trillion last financial year, while LIC’s assets, at Rs 37.46 trillion, were nearly three times those of RIL.

However, LIC reported consolidated net profit or surplus of Rs 4,579 crore in FY21, which would put it 34th spot among the most profitable listed firms in the country, just behind Bajaj Auto and ahead of Bajaj Finserv.

For comparison, LIC’s net profit in FY21 was equivalent to 8.5 per cent of that of RIL, which is Rs 53,729 crore and 14.1 per cent of Tata Consultancy Services’ consolidated net profit of Rs 32,430 crore last financial year. (See the adjoining chart.)

LIC’s net worth of shareholder capital -- a key metric to value a company, especially in the financial services space -- is even smaller. Its net worth of Rs 6,983.2 crore at the end of FY21 would have been the 160th biggest in the listed space, just a notch below that of JM Financial and marginally higher than steel pipe maker Jindal Saw’s.

LIC’s net worth is even lower than that of private sector peers such as HDFC Life Insurance, SBI Life Insurance, and ICICI Prudential Life insurance. For example, HDFC Life Insurance reported net worth of Rs 8,886 crore while for SBI Life Insurance it was Rs 10,907 crore at the end of September 2021 against LIC’s Rs 8,854 crore. 

LIC’s financial ratios such as the return on assets (the profit every rupee of assets generates) and net profit margin (the net profit it earns from a rupee of revenue) are also a fraction of those of its private sector peers. LIC’s return on assets was 0.12 per cent in FY21, less than one-sixth of that of HDFC Life Insurance, which tops the charts with a market capitalisation of Rs 1.25 trillion on Friday.

LIC’s net profit margin at 0.65 per cent in FY21 was a third of that of HDFC Life Insurance (1.9 per cent) and SBI Life Insurance (1.76 per cent).

Analysts attribute LIC’s poor profitability compared to its private sector peers to the differences in insurance products.

“A majority of LIC insurance policies in force are participating policies such as endowment, whole-life or money back plans where it shares most of its surplus with policyholders in the form of bonuses. This leaves very little profit for shareholders,” said Shailendra Kumar, chief investment officer, Narnolia Securities.

In FY21, LIC paid Rs 57,120 crore as interim and final bonus to policyholders. The money accounted for 92.6 per cent of its surplus of Rs 61,699 crore generated from the life insurance business during the year. This was over and above the death claims and maturity benefits paid by the insurer.

Analysts say LIC’s poor profitability is likely to weigh on its valuation when the government and investment bankers decide on the issue price.

“The valuation multiple of LIC would be a discount to that of private sector peers. Private sector insurance companies are currently trading around 3X their embedded value. This ratio would be much lower for LIC,” said Dhananjay Sinha, managing director and chief strategist, JM Financial Institutional Equity.

International brokerage Haitong Securities sees a 10X jump in LIC’s net profit margin from the current level.

“LIC’s reported net profit is highly understated and does not capture its true earning potential. LIC shares 95 per cent of the surplus with policyholders, leaving only 5 per cent for shareholders. By regulation, LIC needs to share only 90 per cent with policyholders, which is what other private players do,” wrote analysts at Haitong Securities.