The elephant that can’t dance! Emkay initiates coverage on LIC with 12-month target below IPO price

NEW DELHI: It is fair to say that the Life Insurance Corporation (LIC) of India has disappointed its investors in the first two weeks since its listing. For most of the days since it got listed on May 17, the stock price has settled in the red. It now trades down over 15 per cent from its issue price of Rs 949.

Now, Emkay Global has initiated coverage on the stock with a ‘hold’ rating and target price at Rs 875, meaning if this proves to be true, the stock may not be able to generate a profit for its IPO investors for quite some time. Going by the current price, the potential upside is about 9 per cent. It also termed the stock as "the elephant that can’t dance."

The issue had come with much fanfare, after a long period of anticipation and a drastic cut in the size. As many as 17 analysts had given subscribe ratings and had high expectations. It was justified, to an extent, as it is the biggest life insurer in India.

Though its size, Emkay believes, is a major hurdle for the stock’s performance.

“Size and legacy are key hurdles in radically changing the product and distribution mix. LIC’s biggest strength has been its vast 13 lakh agent network, with materially higher productivity relative to private peers. However, this also has a cost in terms of a large branch network and higher opex, leading to a traditional par-heavy product mix,” the brokerage said in its report.

LIC’s dominant size in the industry – cornering over 60 per cent market share – is also a problem, Emkay says, as it hides operating challenges. LIC’s dominant share in the single-premium group fund management business artificially inflates its market share and deflates some of its cost ratios, it said.

“LIC’s commission and opex ratios are on the higher side vs cost-efficient larger private players despite its massive scale. Adjusted for the group single-premium business and LIC’s almost ULIPless product mix, its persistency and surrender ratios are not impressive,” Avinash Singh and Mahek Shah of Emkay Global wrote in their Thursday report.

They say their neutral view is underpinned by three factors:

• Low VNB relative to EV, which limits the potential-RoEV to near premium-unwind rate
• Lower APE growth and margin prospects vs private sector peers, as LIC’s higher commission costs and opex (excl group fund mgmt biz) limit the scope for product and channel diversification.
• Inherent volatility in EV as 35 per cent of non-par assets are in equity and no track record of EV movement under the new fund bifurcation structure.

LIC had also disappointed investors when it came out with its Q4 earnings earlier this week. The behemoth said its consolidated net profit for the quarter ended March was down 17.41 per cent even as net premium income rose 17.88 per cent. It also announced a token Rs 1.5 dividend.

Adding that LIC’s valuation attractiveness is more optical than fundamental, Emkay said, LIC’s intrinsic value resides almost entirely in the existing EV; as such, the return on EV will essentially come from the unwinding of the discount and not from VNB addition.

“Thus, RoEV will likely be closer to the unwinding rate, pushing the fair value into the 1x EV zone. An important point about LIC’s EV is that 75 per cent of its H1FY22 EV has come from a change in surplus sharing formula, bifurcation of the par and non-par funds, and passing of almost all fair value gains into the non-par policy funds.

Further, a major part of these gains is in the form of equity MTM gains,” it said.

There is not much broker coverage on the stock yet. Macquarie, which initiated coverage even before the listing of the issue, had set the target of Rs 1,000 on LIC.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times.)