Brokerage firm Emkay Global Financial Services has said Life Insurance Corporation (LIC) of India is an elephant that can’t dance, as it believes that the attractive valuation of the state-run insurer is more optical than fundamental.
The brokerage firm has initiated coverage on the stock with a "hold" rating with a price target of Rs 875 a share.
The brokerage firm said its "neutral" view is underpinned by the low value of new business relative to embedded value, low annual premium equivalent growth and margin prospects and inherent volatility in the embedded value of the company.
LIC’s shares have come under pressure since their listing on May 17. The stock has fallen 15 percent from its issue price of Rs 949 a share, leading to losses even for its policyholders who were given a hefty discount of up to Rs 60 a share during the initial public offering.
“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 ~8-11 percent in the case of private life insurers,” Emkay Global said.
The brokerage firm is of the view that LIC’s dominant size hides the operational challenges that the country’s largest life insurer faces. “LIC’s dominant share in the single-premium group fund management business artificially inflates its market share and deflates some of its cost ratios,” Emkay Global said.
It has valued the life insurer at 0.9 times its one-year forward price-to-embedded value. The brokerage firm has ignored any improvements in the embedded value from the future value of the new business.
“The overall EV returns are going to be lower and a mature life insurance company like LIC, with a large back-book and limited new business strain, should be valued closer to EV,” Emkay Global said.
It said the unwinding rate, or the rate at which future cash flows are discounted, could be higher than that of private sector peers because of a large portion of equity investment backing non-participant policyholders’ liabilities.
“This is bound to result in higher volatility in EV, potentially feeding into the share price,” Emkay Global said.
At 10.10 am, shares of LIC were down 0.1 percent at Rs 809.9 on the National Stock Exchange. Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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