The stock has misplaced 34% from its IPO situation value of Rs 949.
“Increasing non-participating mix (currently ~5% in APE mix as of Q1FY23) and change in surplus distribution policy are significant growth drivers of the value of the new business (VNB) and in turn embedded value (EV). This, against the strong growth outlook of the Indian life insurance (especially through the lens of sum assured), makes LIC a strong investment proposition considering it is currently trading at 0.73x FY22 price to EV,” mentioned the brokerage.
The largest public-run insurer instructions a 44% share of the full annual premium equal (APE) market as of FY22. Besides a strong back-book (AUM of Rs 41 lakh crore as of Q1FY23), excessive model worth and difficult-to-replicate company power are its competitive moats.
Increasing non-participating combine (at the moment ~5% in APE combine as of Q1FY23) and alter in surplus distribution coverage are vital development drivers of the worth of the brand new business (VNB) and in flip embedded worth (EV), famous the brokerage.
The brokerage mentioned that the VNB a number of for the insurer must be excessive, pushed by a rise within the non-par combine in addition to a gradual improve in surplus distribution in the direction of shareholders. It expects LIC to register VNB margin of 14%/15% and VNB of Rs 8300/9800 crore in FY23E/FY24E
“Concerns on equity sensitivity to EV is overdone and the relative ease of increasing VNB margin through a change in the mix is under-appreciated,” mentioned the brokerage.
Hence, it has initiated a purchase on the counter for a goal value of Rs 917, primarily based on 15x FY24E VNB of Rs 9,800 crore and 0.7xFY24E EV of Rs 6.2 lakh crore. The brokerage mentioned it factored an impression of ~Rs 40000 crore (FY23+24) to issue a ten% correction within the fairness market whereas discounted EV a number of adequately components any additional threat from the excessive fairness market sensitivity of the excess guide.
“The multiple of 0.7x to EV is equivalent to almost 50% market share correction based on the current sensitivity of EV to equity market movements. Even at this multiple, the resultant upside at CMP is 48%, implying an attractive valuation of the stock,” iterates the brokerage.
The largest public situation of LIC had listed at a reduction of over 8% at Rs 867.2 per share on the BSE.
(Disclaimer: Recommendations, ideas, views and opinions given by the specialists are their very own. These don’t symbolize the views of Economic Times)
