LIC Shares Surge Over 7% in 5 Days; Analysts See Up To 20% Further Returns

LIC Share Price: Life Insurance Corporation shares surged in early trade after brokerage firm Motilal Oswal gave the insurance behemoth a ‘Buy’ rating. It said that it finds valuation at 0.7 times FY24E EV reasonable. “LIC’s valuation at 0.7x FY24E EV appears reasonable considering gradual margin recovery and diversification in the business mix though high sensitivity to equity market volatility remains an overhang,” the note stated. The brokerage house has initiated coverage on LIC shares with a ‘Buy’ rating and a target price of Rs 830 apiece.

Motilal Oswal estimates LIC to deliver around 10 per cent CAGR in NBP during FY22-24E while the Value of New Business (VNB) margin is likely to improve to 13.6 per cent on improving product mix and higher profit retention. However, it estimates LIC’s operating RoEV to remain modest at about 9.7 per cent on lower margin profile than private peers.

Motilal’s target suggests a 20 per cent upside over Monday’s closing price of Rs 692.50 on BSE.

Key downside risks, as per the brokerage, include a slow ramp up of individual Protection and Non-par savings, low share and productivity of banca channel and a sharp correction in equity markets.

“LIC enjoys a high market share in the Annuity segment (77 per cent in FY21) due to its strong positioning in the group business. The share of Annuity in total new business mix stood at 21 per cent in FY21. The annuity has enabled LIC to report high VNB margin of 118 per cent in the Non-PAR segment and it has immense growth potential. However, private players are also catching up fast as they have reported 23-131 per cent CAGR over the past three years (FY19-22),” the note stated.

Motilal Oswal felt that while the focus on profitable growth will compel LIC to reassess its growth trajectory, manoeuvring such a large franchise will be a challenging task and requires superior execution over the next few years.

It expects LIC to report a per cent CAGR in New Business Premium (NBP) and 8 per cent in Annualized Premium Equivalent (APE) over FY22-24E. VNB margin is seen improving to 13.6 per cent during the period but even at that level, LIC’s VNB margin will be around half of what most of the other private players will be generating, Motilal Oswal said.

At present, LIC’s product mix is dominated by traditional savings business with low-margin PAR products accounting for 19 per cent of total NBP and 65 per cent APE in FY21. While most of the private players have focused on increasing the mix of high-margin non-PAR and protection products, LIC’s reliance on PAR products remained high.

“However, the company aims to ramp up the mix of non-par business markedly, driven by consistent new product launches in the non-par segment,” Motilal noted.

Motilal said LIC’s operating return on embedded value (RoEV) may remain modest at 9.7 per cent on a lower margin profile than private peers. The key downside risk for LIC includes a slow ramp-up of individual protection and non-par savings, low share and productivity of the banca channel, and a sharp correction in the equity market. ..

LIC’s share price has fallen sharply since its listing on the stock exchanges on May 17, 2022. LIC shares were allotted to the investors at Rs 949 apiece and got listed at the stock exchanges at discount. The stock is about 34 per cent down from its IPO issue price of Rs 949.