LIC Q3 Review: Analysts See Upside For Shares Even As Challenges Persist
Analysts see a potential upside for the shares of LIC after its Q3 premium and revenue rose, and VNB margin remained stable.
Analysts see a potential upside for the shares of Life Insurance Corp. after its third-quarter premium and revenue rose, and new business margin remained stable.
The state-owned life insurer’s net profit jumped 26 times year-on-year but declined 60% sequentially in the quarter ended December. The year-on-year jump could be attributed to a change in its distribution policy in September 2021.
Its net premium rose 15% and revenue was up 13% year-on-year.
Value of new business—the present value of the future profits associated with new business written during the nine months ended December—stood at Rs 5,478 crore. VNB margin was at 14.6%.
Shares of LIC closed 1.1% higher on Friday, a day after the results, compared with a 0.2% decline in the BSE S&P Sensex.
Of the 15 analysts tracking the company, 12 maintain 'buy' and three suggest 'hold', according to Bloomberg data. The return potential of the stock is 33.7%.
Here’s what brokerages have to say about LIC’s Q3 FY23 performance:
Motilal Oswal
Maintains ‘buy’ with a target price of Rs 830 apiece, implying an upside of 34%.
Of Rs 6,334-crore PAT in Q3, Rs 5,670 crore was a result of the transfer from the non-par segment to shareholders’ accounts (related to accretion on available solvency margin).
VNB declined 21% year-on-year to Rs 1,800 crore as VNB margin moderated by 60 basis points quarter-on-quarter to 14.6%.
In terms of new business premium, the share of participating products was lower at 66%.
Annuity/pension and unit-linked insurance policies constituted the bulk of the residual with 24% and 7%, respectively.
Expect the momentum to sustain in the medium term, led by incremental focus and introduction of new products (in non-par).
The bank has launched six new products in the non-par segments in the first nine months ended December.
Sequential decline in VNB margin was due to higher growth in the ULIP segment (lower margin profile) and re-pricing in annuity products.
Persistency ratio saw mixed trends, with improvement in select cohorts.
LIC is witnessing an increase in the mix of business by banca and other channels.
Cut FY23/FY24 VNB margin estimate by about 100/110 bps to 14.8%/15.3% and VNB estimate by 9%/10%, respectively.
Expect operating return on embedded value to remain modest at 10.4%, given its lower margin profile than private peers.
Company has all the levers in place to maintain its industry-leading position and ramp up growth in the highly profitable product segments (mainly protection, non-par, and savings annuity).
However, changing gears for such a vast organisation requires a superior and a well-thought out execution plan.
It is trading at 0.6x FY24 EV, which appears reasonable considering the gradual recovery in margin and diversification in the business mix.
Emkay Global
Maintains ‘neutral’ reiterating with a downwards revised target price of Rs 700 apiece, implying an upside of 12%.
Nine-month results broadly in line with estimates.
Slowdown in annualised premium equivalent growth in Q3 reflects the continued market share loss in the retail segment.
VNB margin for 9MFY23 at 14.6% was flat versus H1.
Operating parameters such as persistency, commission ratio, individual product mix, and opex ratios were broadly stable adjusted for one-offs.
LIC has started to deliver strong accounting profit.
However, there is very little (relative to EV) value creation from the new business.
Budget: With about 1.8% of retail APE coming from more than Rs 5 lakh annual premium, LIC is better positioned when it comes to 10 (10D)-related proposed changes in the Union Budget. The nudge towards the exemption-less new tax regime could pose a challenge.
On net basis, LIC’s nine-month numbers do not change brokerage's opinion on the fundamental challenges of: slower growth; sticky cost leading to gradual market share loss in the retail segment; subpar profitability reflecting in poor embedded value (shareholder value) compounding.
Currently, LIC is trading on an undemanding valuation.
But higher sensitivity of EV to equity markets, subpar operating RoEV, and sustained retail market share loss leads brokerage to value LIC at a discount to its EV.