Buy The Stock Of LIC For 31% Returns, Industry Leading Levers Intact

Broking firm, Motilal Oswal has a buy call on the stock of LIC for a whopping 31% returns. The broking firm believes all the levers are intact for industry leading growth.

LIC: Good corporate quarterly results

According to Motilal Oswal LIC reported a strong financial performance in 2QFY23, with a 48% YoY growth in APE to Rs 252 billion in 1HFY23. VNB grew 132% YoY to Rs 36.8 billion as VNB margin improved by 530 basis points to 14.6% in 1HFY23. VNB margin rose 160 basis points QoQ to 15.2% in 2QFY23.

Shareholder net profit rose 10times YoY to Rs 159 billion in 2QFY23 due to the Rs 143 billion transfer from non-PAR to the shareholders' account as it relates to accretion on available solvency margin.

LIC: business growth remains stable

The Individual/Group business constituted 53%/47% of APE in 1HFY23. Within the Individual business, the share of PAR products remained stable 92%. "In terms of NBP, the share of PAR products was lower at 68%. Annuity/Pension and ULIPs constituted the bulk of the residual at 24%/6%. We expect the momentum to sustain led by incremental focus and the introduction of new products. The 160bp QoQ increase in VNB margin was due to higher margin in the Group segment and Individual PAR business. However, the same was partially offset by a 470 basis points QoQ decline in margin in the individual Non-PAR segment, led by a revision in Annuity rates to make it more competitive v/s its peers. Within the Group segment, a higher share of Annuity drove the 230bp QoQ expansion in margin to 17.6% in 1HFY23," Motilal Oswal has said in its report.

LIC: Buy the stock for a price target of Rs 870

LIC 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 Savings, and Annuity). "However, changing gears for such a vast organization requires a superior and a well-thought out execution. We expect 20% APE CAGR over FY22- 24, thus enabling 28% VNB CAGR. However, we expect operating RoEV to remain modest at 11.8%, given its lower margin profile than private peers. Valuation at 0.6x FY24E EV appears reasonable, considering the gradual recovery in margin and diversification in the business mix. We maintain our Buy rating with a revised target price of Rs 870 (0.8x FY24E EV)," the brokerage firm has said.

Highlights from the management commentary as per Motilal Oswal report

The management aims to achieve a product mix of 75:25 between PAR and the non-PAR business in a couple of years. Moderation in margin in the Individual Non-PAR business is due to the re-pricing of Annuity to make it more competitive v/s its peers. In line with its strategy of launching only Non-PAR products, three new products were launched in 1HFY23. This includes LIC Bima Ratna, LIC Dhan Sanchay, and LIC Pension Plus. The stock of LIC was last seen trading at Rs 661.

The stock has fallen significantly from its IPO price and also from its 52-week high of Rs 920. The shares have also hit a low of Rs 588.