PSU Stock's Net Profit Zooms Multifold To Rs. 15,952 Cr, Strong VNB, Buy Stock For 46% Likely Return

Top brokerage firm ICICI Securities has given a buy rating to the stock of Life Insurance Corporation of India (LIC). The PSU insurance company is the Indian insurance market leader with a 44% share of the total APE market (on a weighted basis) as of FY22. LIC recently recorded a net profit of Rs. 15,952 crore in Q2 FY23, showing a multifold zoom from Rs. 1,433 crore in Q2 FY22.

Stock To Buy: Target Price

The Current Market Price (CMP) of LIC is around Rs. 627. ICICI Securities has estimated a Target Price for the stock at Rs. 917. This stock has the potential to give a 46% return, in the upcoming 12 months. It is a large-cap stock with a market capitalization of Rs. 397,020 crore.

Stock Outlook
Current Market Price (CMP)	Rs. 627
Target Price	Rs. 917
Potential Upside	46.00%
52-week high share price	Rs. 918.95
52-week low share price	Rs. 588

Stock Upside: LIC

Increasing non-participating mix (currently ~5% in APE mix as of Q1FY23) and change in surplus distribution policy are significant growth drivers of value of new business (VNB) and in turn embedded value (EV). This, against the strong growth outlook of the Indian life insurance (especially through lens of sum assured), makes LIC a strong investment proposition considering that it is currently trading at 0.73x FY22 price to EV. Concerns on equity sensitivity to EV is overdone and the relative ease of increasing VNB margin through change in mix is under-appreciated.

Stock Valuation

Maintaining a buy rating, the ICICI Securities said, "We have factored an impact of Rs. 400bn (FY23+24) to factor 10% correction in equity market while our discounted EV multiple adequately factors any further risk from the high equity market sensitivity of the surplus book. The multiple of 0.7x to EV is equivalent to almost 50% market share correction based on current sensitivity of EV to equity market movements. Even at this multiple, resultant upside at current market price is 48%, implying attractive valuation of the stock. We value LIC at multiples of 15x FY24E VNB and 0.7x FY24E P/EV."

Strong Q2 VNB Growth

VNB growth for LIC will be driven by increase in non-par mix, and gradual increase in surplus distribution towards shareholders. The brokerage added, "We have seen that product-mix-driven increase in VNB margin is a fairly straightforward objective as seen from industry peers. SBI Life / HDFC Life / IPRU Life VNB margins expanded from ~17% / 23.7% / 16.5% in FY18 to 26% / 26.7% / 28% in H1FY22, largely driven by change in mix. Additionally, for VNB, the assumed proportion of future surplus to be distributed to shareholders (by year of surplus emergence) will increase as follows: 5% for FY22, 7.5% for FY23, 7.5% for FY24 and 10% from FY25 onwards in case of the participating book of LIC."

Disclaimer

The above stock was picked from the brokerage report of ICICI Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.