Shares of LIC, the largest life insurer in India, are down 31% since its initial public offering (IPO) and analysts at JP Morgan think markets are mispricing the newly listed stock. They believe that the market views LIC as an equity market proxy and that recent weakness in markets is overdone.
"Our thesis centers on LIC’s 0.75x Price to Embedded Value – a measure of the market value of an insurer’s current and future policies. LIC’s new business value is only 1% of its policies in force. Therefore, with 99% of value from old policies, we see the 0.75x P/EV as unduly harsh, even assuming no growth. In reality, LIC has picked up growth recently, and we forecast 6% FY22-FE growth, "the note stated."
The global brokerage has initiated coverage on LIC shares with an overweight (OW) rating given its attractive valuations with a target price of (March 2023) of 840.
"It is the cheapest stock in our insurance coverage at 0.75x FY23E EV." Private sector insurers are trading at a premium of 2-3x but are growing faster and have a long track record of disclosures as compared to just one EV data point for LIC. That said, LIC’s discounted valuation and simple product structure make it "too cheap to ignore on valuation," it said.
The first ever EV report as of September 2021 was up 5x on base due to higher profit accumulation post change in surplus distribution regulation. In JP Morgan's view, LIC would need to show consistency in EV, which would signal accuracy in the assumptions used. Similarly, in terms of new business profitability or Value of New Business (VNB), a steady margin is key.
"We find the value compelling even after adjusting EV lower for market declines and tacking on an additional 15% discount to fair value. We see building investor confidence through consistency and disclosure as the rerating driver. The next EV release is due June 30th, "the brokerage added.
However, key risks, as per JPM, are: consistent stake reduction by the government; national service by way of products or asset allocation; investment write-offs; premium decline.