Domestic brokerage house ICICI Securities believes India's largest life insurer Life Insurance Corporation (LIC), which got listed earlier this year, is likely to surge over 45 percent in just 1 year.
The brokerage has a 'buy' call on the issue with a target price of ₹917, indicating a potential upside of as much as 46 percent from the current market price.
ICICI is bullish on the stock on the back of cheap valuations, high market share, multifold jump in September quarter earnings, etc.
"LIC is the Indian insurance market leader with a 44 percent share of the total annualized premium equivalent (APE)market as of FY22. Robust back-book, high brand value, and difficult-to-replicate agency strength of 1.33 million individuals are competitive moats. Increasing non-participating mix and change in surplus distribution policy are significant growth drivers of the value of new business (VNB) and in turn embedded value (EV). This, against the strong growth outlook of the Indian life insurance, makes LIC a strong investment proposition considering that it is currently trading at 0.73x FY22 price to EV," explained the brokerage.
Stock price trend
Shares of LIC jumped nearly 9 percent in trade on today, November 14 on the back of strong September quarter results.
It is important to note that the stock has never traded above its IPO price of ₹949, since listing in May 2022. The stock is currently down nearly 34 percent from its issue price. In November so far, however, the stock has gained almost 10 percent after a 2 percent and 7 percent decline in October and September, respectively.
Earnings
LIC reported a net profit of ₹15,952 crore for the quarter ended September (Q2FY23) on Friday, a manifold increase from ₹1,433 crore in the corresponding period last year.
In the June quarter, the insurer reported a net profit of just ₹682.9 crore. First-year premium, an indication of business growth, came in at ₹9,124.7 crore for the quarter compared with ₹8198.30 crore a year ago.
Net premium income was ₹1.32 lakh crore, compared with ₹1.04 lakh crore in the year-ago period.
Investment rationale:
Market share: The ICICI Securities report noted that LIC is a market leader with 68 percent market share in total new business premium (NBP), 46 percent in terms of weighted APE, 80 percent in terms of group NBP and 42 percent in individual NBP in FY23-to-date.
"LIC has been gaining market share in the group NBP while individual NBP has been on a declining trend (from Jun’20 to Dec’21), however, with a renewed focus on non-participating saving products, the company has the potential to grow faster than industry," pointed out the brokerage. It further informed that LIC is ranked fifth globally in terms of life insurance gross written premium (GWP) and 10th globally in terms of total assets.
Trusted Brand: LIC is a trusted brand with a customer-centric business model LIC was incorporated in 1956 and up to the year 2000 it was the only life insurance provider in India, which made LIC, as a brand, synonymous with life insurance in India, noted ICICI. The brand LIC was recognised as the third-strongest and 10th most valuable global insurance brand in CY21, as per the Insurance-100 2021 report released by Brand Finance, it added. As per the report, the brand value of LIC in CY21 was US$8,655 million, with a Brand Strength Index (BSI) score of 84.1 out of 100, corresponding to AAA- brand strength rating.
Individual agents: ICICI pointed out that distribution via individual agents is the key strength of LIC. Its 1.3 million agency force has been a very strong economic moat for the company. Agent network productivity of LIC has been far superior to that of industry peers, said the brokerage.
Strong rating from top agencies: The brokerage further pointed out that LIC has reinsurance arrangements with different reinsurers for various lines of businesses – such as term plans, other than term plans, health plans, accident benefits, critical illness riders and group businesses. LIC selects the reinsurers based on the terms offered, reinsurance rating, financial stability, and operational and technical support provided. They continuously monitor the financial health of their reinsurers and have experienced nil defaults from them in FY19, FY20, FY21 and the six months ended 30th Sep’21, it added.
Attractive valuations: LIC is trading at 0.7x trailing price to EV, which is a significant discount to Indian peers, stated the brokerage. Comparison with global peers indicated an average P/EV of 0.8x suggesting a discount again, it added.
VNB Growth: As per the brokerage, the VNB growth for LIC will be driven by an increase in 1) non-par mix, and 2) a gradual increase in surplus distribution towards shareholders. "We have seen that product-mix-driven increase in VNB margin is a fairly straightforward objective as seen from industry peers. We expect LIC to clock a VNB margin of 14/15 percent and a VNB of ₹8,300/9,800 crore in FY23E/FY24E. Accordingly, we value LIC at multiples of 15x FY24E VNB and 0.7x FY24E P/EV," said the brokerage.
However, the brokerage noted that risks include the possible impact of events like the pandemic, which have an impact on distribution partners, investment portfolio and increase in death claims. Additionally, interest rate fluctuations and equity movements may materially and adversely affect LIC’s profitability, it added.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
