LIC stk hovers around June lows but analysts remain bullish, see 37% upside

A rally by the markets, since their June lows, has failed to lift the stock of Life Insurance Corporation of India (LIC). The stock of India’s biggest life insurer closed at Rs 655 apiece on the BSE on Friday, marginally above its record low of Rs 650, hit on June 20, 2022.

In comparison, the benchmark BSE Sensex, and the Nifty50 indices have soared around 14 per cent each during the period. While analysts say equity market volatility will keep the stock’s valuation in check in the near-term, they see up to 37 per cent upside from a one-year perspective.

“Lower contribution of value of new business (VNB) to embedded value, and single-digit return on embedded value (RoEV) of approximately 6.5 per cent in the near term will keep valuations under check,” said analysts at Axis Securities.

The brokerage has initiated coverage on the stock with a one-year target price of Rs 900. LIC’s VNB for the April-June quarter of the current financial year (Q1 of FY23) was Rs 1,861 crore. The corporation’s embedded value as of March 2022 was Rs 5.4 trillion.

VNB reflects the additional earnings expected to be generated through new policies. The VNB margin stood at 13.6 per cent, a drop of around 150-basis points (bps) from the 15.1 per cent reported in the March quarter (Q4 of FY22).

“Given that LIC’s VNB is less than 2 per cent of embedded value, steady return from old policies will mainly drive embedded value growth,” said JP Morgan in a recent report.

The brokerage expects LIC’s March 2023 embedded value to decline 3 per cent year-on-year (YoY) due to mark-to-market (MTM) impact.

“We estimate VNB will add 1.6 per cent to RoEV in FY23. We estimate total embedded value will decline 3 per cent YoY to Rs 5.2 trillion. This is due to negative economic variance, assuming 15 per cent impact on equity markets, and 60-bps increase in bond yield,” the brokerage said.

Every 10 per cent fall in equity markets dents LIC’s embedded value by 7 per cent, while a 100-bps bond yield increase negatively affects embedded value by 0.4 per cent, it added.

LIC’s VNB is positively skewed to rising rates as every 100 bps increase in benchmark rate has over 12 per cent impact on VNB. It has around 1.8 per cent impact on margins, the brokerage said.

From a long-term perspective, JP Morgan maintains an ‘overweight’ stance on LIC given its attractive valuations. LIC, it said, is trading at 0.82 times and 0.77 times its FY23 and FY24 price-to-embedded value multiple, after the post-IPO correction erased Rs 1.7 trillion market cap.

“We believe the market views LIC as an equity market proxy, and recent weakness in markets is overdone. The investor concern was dispelled with LIC’s first embedded value report post-listing. We expect the Street to gain confidence with consistency in embedded value reports, going ahead,” it added.

Those at Geojit Financial Services, which initiated coverage on the stock in August, are optimistic that LIC will continue to maintain its dominant position for a very long time.

“Strong goodwill among the public, government backing, and the robust investment portfolio remain favourable factors. They ensure that the company will continue to perform well in the long term. Though we may see a marginal slowdown in the new business margin growth in the near term, the company’s focus on increasing the contribution from high VNB margin products bodes well,” the brokerage said. It has a ‘buy’ rating on the stock with a target price of Rs 810.

“LIC has all the levers in place to maintain its industry-leading position and ramp up growth in the highly-profitable product segments (mainly protection, non-PAR, and savings annuity). However, changing gear for such a vast organisation requires a superior and a well thought out execution. We expect LIC to deliver 13 per cent CAGR (compound annual growth rate) in annual premium equivalent (APE) during FY22-24. VNB margin is likely to improve to 14.6 per cent,” said Motilal Oswal Financial Services.

The brokerage estimates that operating RoEV would remain a modest 12.4 per cent on a lower margin profile than its private peers.

“LIC’s valuation appears reasonable, considering the gradual recovery in margin and diversification in the business mix. We maintain our ‘Buy’ rating with an unchanged target of Rs 830,” it added.