How valuations of LIC compares with peers?
To begin with valuations of LIC, are much lower than most other private players at the current market price of Rs 905. In the insurance business valuations are done based on the embedded value rather than on the basis of price to earnings method. Some of the peers like HDFC Life, SBI Life and ICICI Prudential Life trade around 2 to 3 times their embedded value, after the recent fall in their share prices. The average market cap to enterprise value ratio of the three is 2.6 times. If we apply the average multiple, LIC is trading at a sharp discount. However, it is in line with the multiples commanded by global peers which are anywhere from 0.21 to 1.89. Hence, it is attractive to buy the stock, based on valuations, but then there are other things that we need to discuss apart from valuations. According to an HDFC Bank report the valuation of LIC is pegged at Rs 6.07 lakh crore, which is around 1.1 times its September 2021 Embedded Value (EV), i.e., the aggregate of its net asset value plus future discounted profits, of Rs 539,686 crore. This is at a significant discount compared to the Price/Embedded Value (P/EV) of its listed peers.
Other insurance players such as HDFC Life Insurance Company trades at 82 times its earnings, ICICI Prudential Life Insurance Company trades at 79 times, and SBI Life Insurance Company at 78 times.
The real problem for LIC is growth prospects
Having said that the question that always arises is for the valuations to sustain, there must be growth. According to reports, LIC has been losing market share, which is a matter of concern. Reports state that the Value of New Business margin of 9.9% in FY21 for LIC, is much lesser than compared to private players, who have VNB margins of 22-27% due to higher share of participation and group products.The markets, these days are focusing more on a growth story and not on a value story. So, if they see growth stocks, they are even willing to pay a heavy premium, even if it is loss making. In short, if the markets do not see growth, we have a problem.
Our simple take on the stock is that at a listing price of Rs 905, the shares of LIC are cheap, however, if the insurance behemoth loses market share, that would become a problem.
Just hold the shares of LIC and avoid a buy or a sell on the stock
Also, in the past we have seen that government companies receive a poor discounting on the bourses and that could be for the LIC stock as well. For example, REC and PFC are trading at a p/e of just 2 to 3 times, despite a strong dividend yield of 8 to 9%. Companies like Coal India, Mazgaon Dock, Cochin Shipyard, NTPC are all near monopoly businesses, but, barely receive a strong discounting on the bourses, despite solid dividend track record. This is going to certainly be a problem for the company going forward.
We believe at the current market price of 905, the LIC Stock is more of a hold and not a buy or a sell. In the next few years, we do not expect stupendous returns from the LIC Stock, but, nominal returns. That again is a factor of market sentiments, which would be crucial. The government has done a good job in offering at cheap valuations, growth would remain crucial for the stock to succeed.