ICICI Securities Is Bullish On This Large Cap Insurance Stock, Suggests Buy For 47% Potential Upside

Stock Outlook & Returns

The current market price of the LIC stock on NSE is Rs 624 apiece, trading 0.29% down from its previous close. Today, it opened at Rs 627 apiece on NSE.

The stock recorded its 52-week high level on 17 May 2022 at Rs 918.95 and the 52 week low level at Rs 588 on 21 October 2022.

LIC made its stock market debut on 17 May 2022. Since its listing on the stock market, it has moved down by 28.73%.

The stock in a week has moved down by 2.36%, whereas in 3 months it moved down by 6.5%. However, in 1 month, the stock has moved up by 6.5%. 

LIC selling more non-par

LIC selling more non-par as a strategy is being driven by the launch of new products as well as through appropriate training to agents. The target groups for selling non-par include young millennials, agents who are already selling these products and also club members which comprise of experienced agents who can eventually sell all the products. Within non-par, the focus is broad-based and includes ULIPS, protection savings and annuity. LIC has a big opportunity in cross-sell and up-sell in individual as well as group business.

Group business is a huge opportunity

LIC had 76% NBP market share and 64% APE (weighted) market share in group business as of FY22. In fact, LIC has business relationship with ~ 80% of all companies with more than Rs400bn market capitalisation. The group business can be divided in three segments namely (1) group funds (2) annuities and (3) group term. There has been an increase in the annuity mix within the group which is one of the contributors to the overall net VNB margin expansion of LIC from 9.9% in FY21 to 15.1% in FY22 and 14.6% in H1FY23. Group VNB margin (gross) expanded from 11.5% in FY21 to 19% in FY22 and 17.6% in H1FY23. Within group, margin pecking order is annuity followed by term and group savings.

Digital efforts are also showing traction

More and more agents are accepting the ANANDA app. This app enables digital on-boarding of agents, canvasing, KYC as well as policy issuance. Number of policies sold by this app has increased from 170k in FY22 to ~400k in H1FY23. Number of agents using ANANDA has crossed 100k. The benefits of this app will get further propagated amongst agents as it becomes popular in agents' groups like study circles. This will also get a boost with 5G rollout in rural areas. The policy issuance can happen within 11 minutes through this app.

LIC can target to reach VNB margin of 25-30% in 3-5 years

The business strategy is not to maximise margin or push any one particular product. Par or group segments will remain strength of the company. However, margin improvement is very much possible through mix change and efficiency. More than margin, absolute VNB can increase substantially.

Claim settlement process is strategically targeted to be made more efficient and without any intermediary help

Nearly 80-85% of claim settlements are survival benefits. This can be paid without any contact and LIC does not need any papers up to a certain amount. The company is strategically targeting more efficiency through a centralised claim settlement process, increasing customer registrations (LIC already has 160-170mn mobile numbers and 30mn email ids) and systematically removing the use of cheque books gradually (this can save a lot of time and cost). However, challenge is the availability of NEFT details in many cases

There is a huge opportunity in bancassurance

The company is working on bancassurance with new tie ups and increasing the efficacy of the existing tie ups. Top management is in touch with banks for increasing the share of LIC in each counter and is also leveraging other relationships which LIC has with all banks. Increasing the number of insurance partners for banks can also help LIC in creating new tie-ups.

There are several prudent provisioning made by LIC. These include: (1) Covid provision of Rs74bn and (2) upfront provisioning of wage revision of Rs115bn. The IDBI asset value (large part) is in par funds. As such, depending upon stake sale and creation of surplus, 10% of the same can go to the embedded value.

Bima Sugam

LIC has sought clarifications on the key aspects of proposed Bima Sugam. Bima Sugam, as a new idea, is most welcome and can help the industry. However, there are key aspects of Bima Sugam that need more clarification including: (1) How can agents have same relevance once BIMA Sugam is there. The platform should not dis-incentivise companies on investing behind agents including training. Fundamentally, agents drive the much-needed push which ultimately brings healthy people also in the insurance pool which can ultimately ensure sustained risk coverage for all people, (2) how to ensure agents don't push products (mis-selling) to consumers in Bima Sugam depending on commission arbitrage (direct commission plus other ways of reimbursements), (3) Bima Sugam should be designed in such a way that there is no particular impact to any one company. For example, LIC already has a bigger agency force than all others and as such may have less incremental benefits from Bima Sugam compared to private peers. Additionally, if Bima Sugam is an industry body, LIC will also end up spending the most considering its market share.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.