LIC listing: After discounted debut, Macquarie sets Rs 1,000 as target

LIC listing: The debut was below expectations, and also lower than the discounted value at which shares were offered to policyholders (Rs 60 per share) and retail investors (Rs 45 per share)

Investors, including policyholders and retail participants, lost funds worth Rs 47,000 crore in Life Insurance Corporation of India’s (LIC’s) as the insurance behemoth’s market capitalization stood at Rs 5.53 trillion at the end of the trading session against IPO valuation of Rs 6 trillion.

The stock as the company debuted at an 8.6-per cent discount at Rs 867 apiece on the BSE, and dropped further to a low of Rs 860 in the intra-day trade.

It, however, erased losses partially to end at Rs 875 per share, down 8 per cent against its issue price of Rs 949. On the National Stock Exchange (NSE), the shares ended at Rs 873. In comparison, the benchmark indices zoomed 2.5 per cent each on Tuesday.

Global brokerage Macquarie has initiated coverage on the stock with a ‘Neutral’ rating as it sees several challenges to its growth plans going ahead.

“Due to legacy reasons, LIC has largely sold just one product, ie, participating (PAR) policies. Management earlier never looked at profitability of products in terms of value of new business (VNB) margins, return on embedded value (RoEV), etc. Hence, to change the approach and start selling high margin non-par savings policies and pure protection products could be difficult in our view,” the brokerage said in its May 17 report.

Ticket sizes for LIC, it added, is also one-fifth that of the private sector, implying the target segment is different, and selling non-par savings products to smaller ticket-sized segments won’t be easy.

“We assume LIC will deliver a 12 per cent annualized premium equivalent (APE) CAGR and a 30 per cent VNB CAGR over FY22-26. But, the downside to our assumptions can’t be ruled out,” it said.

Secondly, the scale up of the bancassurance business may be challenging considering the three largest banks (HDFC Bank, ICICI Bank and SBI) are not a partner for bancassurance.

Thirdly, LIC’s Sep-2021 Embedded Value consists of almost 70 per cent of equity mark-to-market (MTM) gains and hence sensitivity of EV to equity-market corrections is far higher than private-sector peers.

Macquarie values LIC on an appraisal value method by using FY23E EV and a P/VNB multiple of 10x on FY24E VNB to arrive at a Rs 1,000 target price.

 

That said, analysts remain bullish on the stock from a long-term perspective as LIC is the largest asset manager in India with AUM of Rs 40.1 trillion on a standalone basis as at December 31, 2021.

This is more than 3.2x the total AUM of all private life insurers in India, is more than 1.1x the entire Indian mutual fund industry’s AUM, and is 17 per cent of India’s estimated GDP for FY22, according to a Crisil report.

“LIC has the dominant position in the underpenetrated life insurance market with improving the financialization of savings. Also, focus on scaling up of business, leveraging its brand equity and through ramp up of sale of non-participating and group products should lead to improvement in Embedded Value over the medium term,” said Saral Seth, VP-Institutional Equities at Indsec Research.

Moreover, analysts said the discounted listing is an opportunity to buy the stock at even cheaper levels.

“The discounted listing is due to tepid market conditions. But LIC is a good tactical buy from a medium-to-long term perspective and incumbent or new investors should hold it in their portfolio,” said G Chokkalingam, founder and chief investment officer at Equinomics Research.

The IPO of LIC ran between May 4 and May 9, and fetched the government Rs 20,557 crore. The country’s biggest-ever IPO garnered nearly 3 times subscription with policyholders and employees subscribing 5.97 times and 1.94 times, respectively, the portions reserved for them. Retail investors, qualified institutional buyers (QIBs) and non-institutional investors (NIIs) booked 1.94 times, 2.83 times and 2.8 times, respectively.