Life Insurance Corp. of India (LIC) announced its June quarter (Q1FY27) results on Thursday, but the stock has been in focus over the past four days for another sudden and significant development. The government announced an offer for sale (OFS) on Monday after market hours to offload 6.5% stake at ₹383 per share, about 11% lower than the closing price of the day.
The development has positive implications for two main reasons. One, while LIC’s market capitalisation is already among India’s top-10 companies, it has not been included in indices due to its low free float. Post the OFS, higher free float increases the possibility of inclusion in local and global indices, which in turn, could lead to passive flows into the stock from funds that replicate the indices. Thus, demand for LIC stock could go up.
Secondly, the OFS removes the overhang of further supply of shares as the government stake has dropped to 90% from 96.5% earlier. With the next deadline to lower the stake further to 75% as per the listing norms is May 2032, there is no threat of fresh supply of shares in the near future.
In Q1FY27, LIC’s economic profit, also known as the value of new business (VNB), saw robust year-on-year growth of 61% to ₹3,136 crore. For life insurance companies, economic profit matters more than the accounting profit. That’s because VNB shows how much profit can be expected from annualized premium equivalent (APE) of a current year, whereas accounting profit is the profit accruing from policies sold earlier and is also distorted by initial policy selling costs, including commission.
The sharp rise in LIC’s economic profit has meant a whopping 750 basis points year-on-year expansion in VNB margin to 22.9% in Q1FY27, even as APE growth was soft at 8% to ₹13,692 crore. VNB growth surged despite muted APE growth because the APE composition tilted towards a more profitable insurance business. The APE from non-participating individual saving policies (the policies that don’t allow policyholders to share profits of an insurance company, besides term insurance and unit-linked insurance plan) was largely responsible for the incremental individual APE.
These policies grew by 59% year-on-year in APE to ₹1,293 crore. The ULIP segment declined by 17% year-on-year as the popularity of these policies has faded in tandem with the dull equity market.
In the Q1 earnings call, LIC management sounded confident of enhancing VNB margin further to mid-twenties, mainly due to the improvement in product mix.
Valuation matters
Despite good results and positive implications of a successful OFS, the LIC stock faces a valuation hurdle. According to Emkay Global Financial Services’ estimates, the stock is trading at price-to-VNB (similar to price-to-earnings ratio using economic profit) multiple of 28 based on FY27 financials. The brokerage is expecting VNB growth of 10% for FY28, and 9.1% for FY29. For most other companies, investors will hesitate to pay a price-to-earnings multiple of 29 for growth of 10% as it translates into PEG (price-to-earnings ratio/earnings growth) of almost 3x.
Even on a relative basis, using Emkay’s FY27 estimates, the stock of HDFC Life Insurance Co. Ltd trades at a price-to-VNB multiple of 25. So, LIC is trading at about 15% higher valuation multiple. Note that HDFC Life’s VNB growth rate projections are higher than LIC’s at about 15% for FY28 and FY29, which means LIC stock trades at a higher multiple versus HDFC Life despite slower growth rates in future.