LIC Shares Down 14% Below IPO Price; Emkay Global starts coverage on hold, sees upside up to 8%

Life Insurance Corporation of India (LIC) shares are down 14 per cent from the IPO price of 949 rupees, which has even resulted in losses for policyholders who were offered a rebate of up to 60 rupees per share during the IPO . Analysts at domestic brokerage firm Emkay Global Financial Services have a neutral outlook on the stock and see upside potential of up to 8 percent going forward. “LIC is an elephant that can’t dance,” they said, adding that the state insurer’s attractive valuation is more visual than fundamental. LIC shares traded at Rs 809 apiece, down 0.15 percent on the day on the National Stock Exchange (NSE).

LIC stock rating: Hold
Target price: Rs 875; Advantage: 8%

Emkay Global has commenced coverage on LIC shares with a ‘Hold’ rating with a target price of Rs 875 per share. The brokerage firm said its “neutral” view is supported by three factors, including the low value of new business relative to embedded value; low annual premium equivalent growth and margin prospects; and inherent volatility of the company’s embedded value. “While we like LIC’s market-leading position and comfortable valuations, we prefer private sector peers that have better growth, better profitability and therefore higher RoEV prospects,” it said.

evaluation reason

Valuation attractiveness more visual than fundamental: According to the analysts, LIC’s valuation relative to embedded value appears cheaper compared to listed private players; This is justified by the fact that LIC adds only 1.0-1.5% of the EV from the DSO annually, compared to around 8-11% for private life insurers. “With a 65-year legacy (45 years as a monopoly), LIC’s intrinsic value lies almost entirely in existing electric vehicles; Therefore, the return on EV will essentially come from rebate reversal and not DSO addition. Therefore, the RoEV will likely be closer to the run-out rate, pushing the fair value into the ~1x EV zone (assuming no negative surprises from the large backbook),” they said.

Dominant size hides operational challenges: Analysts believe that LIC’s dominant share of the group single premium fund administration business is artificially inflating its market share and reducing some of its expense ratios. LIC’s commission and opex ratios are on the higher side, despite its massive size, compared to cost-effective larger private players, they said. “Adjusted for the group’s single-premium business and LIC’s near-ULIP-free product mix, its consistency and repurchase rates are not impressive,” the report reads.

Valuated at 0.9 times the expected P/EV for one year

The brokerage firm has valued the life insurer at 0.9 times its one-year forward price-to-embedded value (P/EV). It ignored any embedded value improvements from the future value of the new business. “EV total returns will be lower and a mature life company like LIC with a large backbook and limited new business should be valued closer to EV,” said Emkay Global. The reversal rate, or the rate at which future cash flows are discounted, could be higher than that of private sector competitors because a large portion of the equity investment is used to secure the liabilities of non-participating policyholders; this will inevitably lead to higher EV volatility, potentially impacting the share price, he added.

Previously, analysts at Macquarie started coverage on LIC stocks with a “Neutral” tag. However, despite the neutral label, the international brokerage and research firm has set a price target of Rs.1,000 per share for the stock, which is 14% above the list price of Rs.872 per share and even above the IPO price of Rs.949 the stock by an estimate method using the FY23E EV and a P/VNB multiple of 10x on the FY24E VNB to arrive at a price target of Rs 1,000,” analysts had said in the report.

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