Macquarie Sees Double-Digit Upside on LIC

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The country’s biggest IPO in terms of the issue size, the Life Insurance Corporation Of India (NS: LIFI ) lists today on the D-Street. The unlisted shares of LIC were trading at Rs. 934 apiece on Saturday, May 14th at a discount of Rs. 15 to its upper price band. There was an anticipation of LIC having a flat to negative listing based on the current market situation. The expectations proved to be largely in line as LIC got listed at a price of Rs. 865 per share as against the issue price of Rs. 949, a discount of 8.85%. The shares of LIC touched a high of Rs. 918.9 in the morning trade.

The global research firm Macquarie published its research report on LIC where it gave the company a neutral rating with a Target Price of Rs. 1,000. The following are the key takeaways from the report:

The research by Macquarie stated that as India’s largest life insurance company, LIC’s brand and distribution franchise is unparalleled. Following its recent reorganisation, the company is set to increase its share of non-participating pure protection products which currently form just 5-6% of its overall product portfolio. But the report also stated that the ability to sell high-margin non-par products - as opposed to par products that provide policyholders a significant share of policyholder’s surplus - will require a change in the mindset of the organisation and its agency force, which could be LIC’s biggest challenge in their view.

LIC historically has majorly sold just one product which is the participating policies which aren’t the most margin accretive. The report mentioned that the management of LIC historically never looked at the profitability of products in terms of Value of new margins (VNBs), ROEV, etc. Hence, they believe that for the company to change their traditional mindset and start selling high-margin products wouldn’t be very easy. Further, the ticket size of LIC is one-fifth that of the private sector, thus indicating that the target segment of LIC and its private peers are different. Thus, selling non-par savings products to small ticket-sized segments won’t be easy as per Macquarie.

On its distribution network, the report stated that LIC’s highly productive workforce of 1.3mn agents which is close to 7x the size of the next biggest player is a key strength. But they remain doubtful of LIC’s ability to leverage bancassurance well as the 3 largest banks HDFC (NS: HDFC ), ICICI Bank Ltd (NS: ICBK ), and SBI (NS: SBI ) are not a bank partner for LIC.

The embedded value of LIC consists of almost 70% of equity MTM gains and thus its sensitivity to equity market corrections is far higher than private-sector peers. Also, unlike the private peers, the LIC"s contribution to new business to overall value is much lower.

Macquarie Research values Life Insurance companies on appraisal value methodology, which is Appraisal value = Trailing EV + Forward Value of New business * New business multiple. As per this methodology, they value LIC at Rs. 1,000.

Source: Macquarie Research

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    Well.At present it looks to go down further tomorrow and then may recover
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