Shares of Life Insurance Corporation of India (LIC) have fallen 25 percent from their listing in May. Since its listing, brokerages have been skeptical on the stock, however, now post its June quarter results, brokerages seem to be turning bullish on India's largest life insurer.
Brokerage house Macquarie upgraded the stock to 'outperform' from 'neutral' following its June quarter earnings mainly in the back of its cheap valuations. However, the brokerage cut its target price to ₹850 from ₹1,000 earlier.
As per the brokerage, enhanced disclosures made by the life insurance giant for 2021-22 also helped in the upward revision in the value of new business (VNB) and embedded value forecasts made by it. The embedded value represents the company value of a life insurance company, which is important for understanding what shareholders will gain after the company is sold, it added.
"The company’s market share in first-year premiums was 65.42 percent at the end of the June quarter, down from 67.52 percent a year earlier. The country’s largest life insurer’s new business margin fell to 13.6 percent from 15.1 percent in March. LIC hinted that the change in product mix during the quarter was the main reason for the sequential decline in VNB’s margins," said Macquarie.
The value of a new business is a key measure of profitability and represents the additional revenue generated from the sale of policies over a given period.
LIC reported nearly 232 times year-on-year (YoY) growth in standalone net profit at ₹682.88 crore for the quarter ended June 30. It had posted a standalone profit of ₹2.94 crore in the corresponding quarter last year. However, its performance was disappointing on a quarter-on-quarter (QoQ) basis. Its net profit declined 71.2 percent on quarter to ₹2,371.6 crore, while standalone total premium contracted 31.6 percent to ₹98,351.8 crore.
Meanwhile, on a YoY basis, the net premium income of LIC increased by 20.35 percent to ₹98,351.76 crore.
The company’s market share in first-year premium income stood at 65.42 percent at the end of the June quarter, down from 67.52 percent in the year-ago quarter.
During the quarter under review, the asset under management (AUM) increased to ₹41.02 lakh crore as compared to ₹38.13 Lakh crore in Q1 FY22, up 7.57 percent on yearly basis.
Post the earnings, LIC’s Chairman MR Kumar said that the fall in the new business margin in the June quarter is a "temporary blip" and the value of new business margin will improve once the life insurer increases the share of high margin protection plans.
“As the Covid situation normalises, we are seeing a larger activity on the ground, therefore bringing us back closer to our model of having “feet on the street” and continuous in-person engagement with our customers. While the growth numbers are very robust for the first quarter as seen in comparison to the same quarter of FY2021-22, we are aware that the Q1 of the previous year, FY2021-22 was impacted by a very tough second wave of Covid. However, the trajectory is upwards and we are looking at increased business volumes as is evident in our market share in the year to date since January 2022,” he added.
Another brokerage house Motilal Oswal was also bullish on the stock post the earnings. It maintained its 'buy' rating on LIC shares with an unchanged target price of ₹830, saying that its cheap valuation appears reasonable, considering the gradual recovery in margin and diversification in the business mix.
"LIC has all the levers in place to maintain its industry-leading position and ramp up growth in the highly profitable product segments. However, changing gears for such a vast organization requires a superior and a well-thought execution. We expect LIC to deliver 13 percent CAGR in APE during FY22-24, while the VNB margin is likely to improve to 14.6 percent. However, we estimate operating RoEV to remain modest at12.4 percent on a lower margin profile than its private peers. LIC’s valuation, at 0.7x FY24E EV, appears reasonable, considering the gradual recovery in margin and diversification in the business mix," it said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.