Shares of Life Insurance Corporation of India (LIC) have been on a downward trajectory since listing at a 9 percent discount last month. The stock of the largest life insurer in India has shed over 30 percent from its IPO issue price of ₹949 per share, wiping off investor wealth worth nearly ₹2 lakh crore since listing.
Despite this correction, global brokerage JPMorgan has initiated coverage on the stock with an overweight (OW) rating as it is the cheapest stock in its insurance coverage, noted the brokerage. It has a target price of ₹840 for March 2023, but it is important to note that the target price is still below the life insurer's IPO price. However, from its current market price of ₹661, JPMorgan's target implies an upside of 27 percent.
"It is the cheapest stock in our insurance coverage at 0.75x FY23E EV (embedded value). Private-sector insurers are trading at a premium of 2-3x, but are growing faster and have a long track record of disclosures as compared to just one EV data point for LIC. That said, LIC's discounted valuation and simple product structure makes it too cheap to ignore on valuation," stated the brokerage.
JPMorgan added that they believe markets are mispricing the newly listed stock and that the market views LIC as an equity market proxy and that recent weakness in markets is overdone.
“Our thesis centers on LIC’s 0.75x Price to Embedded Value – a measure of the market value of an insurer’s current and future policies. LIC’s new business value is only 1 percent of its policies in force. Therefore, with 99 percent of value from old policies, we see the 0.75x P/EV (price to embedded value), as unduly harsh, even assuming no growth. In reality, LIC has picked up growth recently and we forecast 6 percent FY22-24E growth," the note stated.
It further said that it doesn't foresee LIC trading at private sector valuations of 2-3 times P/EV, but its March 2023 price target is based on 1 times FY23 P/EV, which is justified on a mostly par back book, excess assets on the B/S (balance sheet), and a 185 percent solvency ratio.
In May, LIC made its market debut at a discount to its issue price. It touched a high of ₹920 post listing but has not crossed its issue price level yet. The ₹21,000-crore IPO ran from May 4- 9 and was the biggest ever IPO seen in Indian markets. It also received an overwhelming response and was subscribed 2.95 times in the 3-day period.
Going ahead, JPMorgan believes that LIC would need to show consistency in EV and also a steady trajectory in new business profitability or Value of New Business (VNB) is key.
“We see building investor confidence through consistency and disclosure as the rerating driver. The next EV release is due 30 June," the brokerage added.
Key risks include consistent stake reduction by the govt, national service by way of products or asset allocation, investment write-offs, and premium decline noted JPMorgan.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
