Motilal Oswal sees enough levers for LIC to grow, expects 20% upside

LIC | CMP: Rs 669.50 | The share shed close to 6 percent on June 13. The stock of Life Insurance Corporation of India (LIC) hit a fresh record low after the lock-in period for anchor investors in the company’s IPO came to an end on June 13. With this fall, the stock has now slipped to the sixth position in terms of market capitalisation. At the time of listing, it was the fifth most valued firm in India with a market capitalisation of Rs 6 trillion. The stock has eroded nearly Rs 1.7 trillion in investors' wealth since its listing.

Motilal Oswal Financial Securities believes there are enablers in place for Life Insurance Corporation (LIC) of India to grow but execution remains the key, as it set a price target projecting 20 per cent upside from current levels.

Initiating coverage on the insurance behemoth, the brokerage firm fixed the fair value at Rs 830. This is, however, still less than the IPO price of Rs 949, meaning even if the level is achieved, primary investors will be sitting on a loss.

The target price set by Motilal Oswal is among the lowest so far. Emkay and JP Morgan have target of Rs 875 and 840, respectively while Macquarie the the fair value at Rs 1000.

Since listing in mid-May, the stock has seen heavy selling. It hit an all time low of Rs 650, but buying at that level has brought it closer to Rs 700 level now.

top management level,” said Motilal Oswal.

The broker estimates LIC to deliver 10 per cent CAGR in new business profit (NBP) during FY22-24 while value of new business (VNB) margin is likely to improve to 13.6 per cent. However, it expects its operating Return on Embedded Value (RoEV) to remain modest at 9.7 per cent on a lower margin profile than private peers.

LIC is the largest life insurer in the country with market share north of 60 per cent. However, low profits despite huge size and reducing market share has been worries for its investors. It is also among the ‘cheapest’ available life insurance stock at 0.7 times FY24 expected embedded value, which Motilal Oswal believes is reasonable considering the gradual margin recovery and diversification in business mix.

So far, LIC has maintained its market leadership position in the life insurance industry underpinned by its strong brand, vast distribution, and superior customer-connect despite the advent of a large number of private players. These things may still work for the firm, according to the broker.

“Unlike private peers, LIC relies on its dominant agency channel to distribute insurance products; yet it has maintained a strong control on the cost ratios,” said Motilal Oswal.

Even though annuity business – with 77 per cent market share – is the most rewarding segment for LIC, according to the broker, with most private players implementing tariff hikes over the recent months, the competitiveness of LIC in the protection segment has improved.