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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.

<div class="paragraphs"><p>Source: BQ Prime</p></div>
Source: BQ Prime

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.