LIC stock crosses ₹700 mark after 11 months; what lies ahead?
LIC has introduced a new non-par product, LIC Jeevan Utsav, featuring a combination of limited pay (5–16 years) with lifelong income. Non-par is a value-adding segment, and an increase in the share of non-par can boost LIC’s overall margins.
Following a subdued performance post listing, LIC shares experienced a notable upswing in November, concluding with a substantial gain of 12.83%, marking the most significant monthly increase for the stock since its debut in May 2022. In the previous trading session, the stock crossed the ₹700 mark after 11 months, finishing the trade at ₹719.
At current levels, the stock is just 4.9% away from its 52-week high of ₹754.20 apiece. The surge in momentum is attributed to the anticipation surrounding its new non-par product, 'Jeevan Utsav,' translating to the "celebration of life."
LIC has introduced a new non-par product, LIC Jeevan Utsav, featuring a combination of limited pay (5–16 years) with lifelong income. According to a recent note from domestic brokerage firm Kotak Institutional Equities, Jeevan Utsav offers internal rate of return (IRR) ranging from 4.0% to 5.5% in select cohorts. These rates are slightly lower than those offered by non-par products from leading private players. Non-par is a value-adding segment, and an increase in the share of non-par can boost LIC’s overall margins, Kotak highlighted.
The brokerage is optimistic about LIC's robust marketing agency force, noting that the focus has primarily been on its par policies. The brokerage pointed out that the agency team is well-equipped to promote non-par policies. The next four months will determine the success of this product, it noted.
Assigned lower multiple to core business
The brokerage valued the core business at 5x VNB, translating to 1.1x EV. This valuation is comparatively lower than that of private peers (11–24X VNB in the AV model) or 1.8–2.9x EV.
The key differentiator, as highlighted by the brokerage, is the slower EV growth for LIC, with a Return on Embedded Value (RoEV) of 9%, contrasting with the 16–19% range observed for private players.
LIC reported 13% APE growth in FY2023 and 11% decline in FY2024 YTD as compared with 24% and 14%, respectively, for the private sector during this period. The downturn in LIC's APE is attributed to a significant 29% YTD drop in group business. Kotak anticipates a modest 2% APE growth for FY2024E, followed by a gradual 2-3% growth during FY2025-26E.
Kotak projects margins to remain rangebound (16.4–17.6%) for LIC, even as tailwinds emerge from an increase in the economic share of the par business and an increase in the share of non-par over time.
In 1HFY24, LIC reported a VNB margin of 14.6%, flat year-on-year (YoY). The impact of the change in the interest rate assumption weighed on margins, and the share of non-par stood at 2% of APE in 1HFY24, Kotak stated.
Large haircut on unrealised equity gains
The brokerage factored in a 50% discount to LIC's unrealised equity gains, resulting in a Fair Value (target price) of ₹1,040 apiece. These unrealised equity gains make up 26% of the brokerage's overall Fair Value assessment. The target price implies an upside potential of 45% for the stock from its previous closing price.
The positive momentum in the capital market acts as a favorable factor for embedded value (EV), and any enhancement in the core performance would further strengthen the investment case, the brokerage added.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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