Markets are mispricing the LIC stock, international research firm JP Morgan said in a report, after the counter witnessed a steep fall since listing. The brokerage firm initiated coverage on the stock with an overweight rating. The brokerage firm has pegged a target price of Rs 840 apiece, which is 30 per cent upside from today’s low. However, the target price is still far below the listing and issue price. Earlier this week, the insurance stock hit an all-time low of Rs 650, as against the IPO price of Rs 949 apiece.
JP Morgan was also one of the book running lead managers of LIC’s IPO. “We believe the market views LIC as an equity market proxy and recent weakness in markets is overdone. We don’t foresee LIC trading at private sector valuations of 2-3 times P/EV (price to embedded value), but our March-23 price target of Rs 840 is based on 1 times FY23 P/EV, which we think is justified on a mostly par back book, excess assets on the B/S (balance sheet), and a 185% solvency ratio,” said JPMorgan.
Currently, LIC’s total market capitalisation stood at Rs 4.26 lakh crore. However, at the offer price of Rs 949, LIC’s market capitalisation was at Rs 6.02 lakh crore. According to BSE data, the insurer is the seventh most valued firm in terms of market capitalisation, followed by State Bank of India (SBI) with a market capitalisation of Rs 4.13 lakh crore.
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JP Morgan said LIC is trading at 0.75 times FY23 price to embedded value on FY23 earnings basis after a post-IPO correction that saw erosion of Rs 1.9 lakh-crore market cap. LIC primarily worked in national interest earlier. Its surplus was entirely distributed to policyholders (95%) and the Govt (5% as dividend). The brokerage firm added that the regulatory change now ensures LIC retains more profit. “FY22 profit was Rs 40 bn, +39 per cent on-year. These changes were effective for 2H and that too not to its full extent. Dividend payout was 23% (Rs 1.5/share). We estimate conservative 12% profit CAGR over FY22-25E,” it noted.
JP Morgan said that prior to IPO, LIC’s operations were largely focused on par policies that allow for consistent cash flows. “Amendments to the LIC Act prior to listing resulted in separation of par and non-par funds with a revised surplus distribution policy in favor of the shareholder (95:5 to 90:10 by FY25). Furthermore, LIC is working on diversifying its product mix to the margin accretive non-par segment,” it said.
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