LIC shares at Rs 1,000? Why Kotak sees 40% potential upside on the insurance behemoth

Kotak Institutional Equities has initiated coverage on Life Insurance Corporation of India (LIC) with a 'Buy' rating and a target of Rs 1,000, saying prevailing valuations for the life insurer are largely ignoring its strengths. It expects LIC to shift its product mix to high-margin non-par segment, and support high growth in earnings. 

The brokerage values the stock at 1.3 times core EV (embedded value) December 2024E against 2.1-3.2 times valuations for private peers. The target price, it said, includes a 50 per cent haircut on unrealised equity gains. At Monday's closing price, the target suggested a 41 per cent potential upside on the counter.

On Tuesday, the scrip was trading at Rs 723.80, up 2 per cent.

"Its margin expansion, driven by the shifting of the product mix by its unparalleled agency force, should boost VNB growth, even as overall medium-term APE growth will likely to be lower than private peers. The large unrealized equity gains (59 per cent of FY2022 EV) should also support LIC’s EV but make it leveraged to capital market movements," Kotak said in a note.

VNB stands for value of new business while APE stands for annualised premium equivalent.

Despite ceding share to private players, India’s insurance behemoth has retained 37 per cent market share in individual APE in FY2022, Kotak said. Its enormous agency franchise remains the cornerstone of its success, driving 96 per cent of individual NBP in FY2022, Kotak said adding that the high productivity of LIC's agency force, coupled with the benefits of scale, drives cost leadership.

NBP stands for new business premium.

This is against listed private peers that largely depend on banks (44-65 per cent of individual NBP) to drive their business.

"We remain positive about LIC’s ability to steer the product mix to the high-margin, non-par segment from the large share of the participating business (29 per cent of APE in FY2022)," it said.

The brokerage expects LIC to deliver a VNB CAGR of 18 per cent in FY2023-25E, owing to an APE CAGR of 13 per cent and 180 bps margin expansion.

It said the bifurcation of funds led to a sharp increase in EV, a large part of which reflects unrealised gains in the equity book, thereby compressing return on embedded value.

"Better economics for shareholders due to the 100 per cent share in the non-par book and 10 per cent (5 per cent earlier) in the par book will likely support high growth in earnings (Rs 25,800 crore in FY2025E versus Rs 4100 crore in FY2022)," it said.

Meanwhile, key risks to LIC’s business stem from competition from private players that have a more diversified product mix and sourcing, Kotak said.

"A correction in the equity market can pose a significant risk to EV because of its large equity investment book, especially in the non-participating segment," it said.

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