JP Morgan India, one of the 10 book-running lead managers of Life Insurance Corporation of India’s record-breaking initial public offering, feels that the market’s treatment of the country’s largest life insurer has been unfair.
The shares of LIC fell to their fresh 52-week low of Rs 650 on the National Stock Exchange on June 20 as the investment banker’s research wing initiated coverage on the stock with an “outperform” rating and a price target of Rs 840 a share.
Shares of the life insurer have tanked more than 30 percent since its listing on May 17, driven by concerns over its growth, perceived volatility in its embedded value and concerns over competition from private sector players.
“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 0.75 times P/EV (price-to-embedded value) as unduly harsh, even assuming no growth,” JP Morgan India’s research wing said in a note.
The brokerage firm said that LIC has picked up growth recently and expects the same to trend at 6 percent on an annualised basis over the current and next two financial years.
“The improved ability of agents post re-opening should drive growth. In the last four months, LIC’s retail premium is growing faster than industry (+32% y/y) and is above 2019 level,” JP Morgan said.
The brokerage firm is of the view that higher consistency in disclosure of embedded value going ahead could help trigger re-rating in the stock.
“In our view, LIC would need to show consistency in EV which would signal accuracy on assumptions used,” the brokerage house said.
The stock listed on the bourses at Rs 865 against the issue price of Rs 949. The government raised nearly Rs 21,000 crore by selling around a 3 percent stake in the life insurer through India’s biggest IPO, which is now being counted in the ranks of the world’s biggest let-downs as far as public issues go.
Brokerages such as Macquarie Securities India and Emkay Global Financial Services, on the other side, have remained neutral on the life insurer despite meaningful correction in the stock price since their initiation of coverage and represent the scepticism around the company’s prospects.
Macquarie initiated coverage on the stock in May with a “neutral” rating, saying that the ability to sell high-margin non-par products—as opposed to par products that provide policyholders a significant share of policyholder’s surplus— will require a change in the mindset of the organization and its agency force, “which could be LIC’s biggest challenge in our view”.
LIC’s shares are currently trading 34 percent below Macquarie’s price target for the stock of Rs 1,000 per share.
‘Elephant that can’t dance’
Brokerage firm Emkay Global Financial initiated coverage with a “neutral” rating, arguing that LIC was an “elephant that can’t dance”.
“LIC’s valuation on price-to-embedded value appears cheaper when compared with listed private players; this is justified by the fact that LIC adds merely 1.0-1.5 percent of EV each year from VNB, as against around 8-11 percent in the case of private life insurers,” Emkay Global said in a note in early June.
While all three brokerages which have initiated coverage on the stock agree that LIC’s fair value lies close to one time its one-year forward embedded value even though their estimates for embedded value differ, market participants remain far away from that valuation.
As per JP Morgan, investors are valuing the stock at merely 0.75 times its estimate price-to-embedded value.
At 12.05 am, shares of LIC managed to recoup all of their losses and rise 0.6 percent to Rs 658.50 on the NSE but still lacked the enthusiasm portrayed by its former investment banker.
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