Initially termed as a 'game-changer', the state-run Life Insurance Corporation of India (LIC) was the biggest listing ever in the Indian markets. However, the stock turned out to be a massive wealth destroyer for its investors.
The stock, which was listed on this day a year ago, has fallen 40 percent from its IPO price of ₹969 and has shed 35 percent from its listing price. Till date, the stock has not touched its issue price.
The LIC IPO has an issue size of ₹21,000 crore, the highest ever in India and was oversubscribed 3 times. It was listed at a 9 percent discount at ₹867 on BSE. On NSE as well, it listed at an 8.11 percent discount at ₹872.
At the time of listing, LIC was India’s 5th most valuable company with a market capitalisation (m-cap) of ₹5.48 lakh crore. However, since then, the stock has slipped to the 13th position. It has eroded its m-cap by around ₹2 lakh crore to ₹3.59 lakh crore, as on May 16, 2023.
“We had a buy recommendation during the IPO subscription and after that, we have a standalone recommendation to buy with a long-term time horizon. We believe there is a huge market as far as 'Insuring the Uninsured' is concerned. This will not only create opportunities for LIC but also for the other related entities like HDFC Life, ICICI Prudential and SBI Life,” said Gaurang Shah, Senior Vice President at Geojit Financial Services.
2023 has also not been a good year for the life insurer with it down 17 percent till date. While the stock has risen 3.3 percent in May so far and 2.9 percent in April; it witnessed massive correction in the first 3 months of the current calendar year. The stock lost 7.6 percent in March, 11.5 percent in February, and 4.5 percent in January 2023.
The stock touched its all-time high of ₹920 on its listing day only, which is also below its IPO price. Meanwhile, it touched its all-time low of ₹530.29 on March 29, 2023, during the Adani-Hindenburg crisis. LIC has over ₹30,000 crore investment in Adani Group stocks which took a big hit after the Hindenburg Research report.
A key factor that impact all-insurance stocks including LIC this year was Finance Minister Nirmala Sitharaman's announcement in the Union Budget this February regarding limiting income tax exemption from the proceeds of insurance policies.
Sitharaman announced that income earned from all life insurance policies, excluding unit-linked insurance plans (ULIPs), with a premium of above ₹5 lakh will be taxable. This is applicable for new policies, issued post-April 1, and not for the existing ones. Also, the Finance Minister provided a higher impetus for individuals to shift to the new tax regime, which does not favour tax exemptions on investments in insurance schemes.
All these announcements negatively impacted the insurance sector as a whole.
“There might be a slight deceleration in growth due to the concerns outlined in the Budget by the Finance Minister. However, considering the long-term perspective, it remains a sound investment,” Shah said.
While the March quarter (Q4FY23) results of LIC have not been announced yet, in Q3FY23, LIC's consolidated net profit jumped over 40 times year-on-year (YoY) to ₹8,349 crore as against ₹211 crore in the same quarter last year. Its net premium income rose 14 percent YoY to ₹1.12 lakh crore for the quarter under review versus ₹98,052 crore in the same quarter last year.
The business momentum remained strong for LIC with its overall market share by first-year premium income rising to 65.38 percent for the nine months ended December as compared to 61.40 percent for the corresponding period last year.
As of December 2022, LIC's assets under management (AUM) increased to ₹44.34 lakh crore compared to ₹40.12 lakh crore, up 10.54 percent YoY.
With the stock continuing on its downward trend, both mutual funds and FIIs have cut stakes in LIC. As per the March quarter shareholding pattern, mutual funds now own a 0.63 percent stake in LIC versus 0.66 percent stake in the December quarter.
FII holding has also reduced to 0.08 percent in March from 0.17 percent in December. However, the stake of retail investors in LIC has risen a bit to 2.04 percent in March from 1.92 percent in December.
But it is important to note that despite the rise in the overall weightage of retail investors in LIC, their total number in the insurer has declined. Currently, 33 lakh individual investors hold a stake in the stock as against 39.89 lakh retail investors at the time of the IPO, showcasing a reduction of 6.87 lakh retail investors in just 1 year.
Cyril Charly, Research Analyst at Geojit Financial Services noted that LIC is a market leader in an under-penetrated Indian life insurance market but still has been in free fall since its listing due to multiple headwinds like weak market conditions, the Adani-Hindenburg row and changes in tax policy. It further added that the management has emphasized increasing the share of non-participating policies in the portfolio mix, driving profitability.
However, going ahead, Charly expects LIC to have minimal impact on the tax implications due to its versatile client mix. The stock is currently trading at an appealing valuation, exhibiting a substantial discount compared to its industry peers, he said. While near-term performance may be shackled by sectorial uncertainties, long-term investors can anticipate a favourable return, forecasted the expert.
Another brokerage house Motilal Oswal was also bullish on the stock post the earnings. It said that LIC's 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 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 at 12.4 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.