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Know Why the Price of LIC Shares Dropped to a New Low and M-Cap Fell Below Rs 5 Lakh Crore.



Today's LIC Share Price: Shares of the Life Insurance Corporation of India (LIC) have fallen for five sessions in a row. On Monday, the stock fell 2% to Rs 786.05 on the BSE. The state-owned life insurer's market capitalization (market-cap) fell below the Rs 5 lakh crore threshold as the shares fell to their lowest level since their initial public offering (IPO).

Only 2.95 times of the largest IPO in Indian history, worth Rs 20,557 crore, were subscribed. On May 17, 2022, LIC made a shaky stock market debut because it was listed at a discount of over 8% to its issue price. With today's decline, LIC has dropped 17% below its share issue price of Rs. 949 in the past week. The market capitalization of LIC was Rs 6,00,242 at the time of the offering, but it dropped to Rs 5,57,675 at the time of the BSE listing, representing a loss of about Rs 42,500 crore.


In contrast to HDFC Life Insurance Company Ltd., which has a P/E of 96.81, and ICICI Pru Life Insurance Company Ltd. shares, which are seeking a P/E of 96.81, the stock is currently trading at an eye-popping P/E ratio of 123.55.


After Q4 FY22, the 13-month persistency ratio was 69.24%, down from 73.94% during the same period in FY21. The persistency ratio, which measures how many policyholders decide to renew their policies after the year's end, is commonly used in the insurance industry. This measure is crucial for determining how long policyholders maintain their coverage. A decrease in the same is bad news for the insurer.

But the solvency ratio for FY22 was reported at 1.85 as opposed to 1.76 the year before, which is a positive indicator. A higher solvency ratio indicates greater stability in the company's capacity to maintain its solvent financial position.


Should Investors Buy the Dip?


Brokerage company Emkay Global Financial Services started covering LIC this week with a "hold" rating and a target price of Rs. 875, which is around 11% higher than the current pricing. The brokerage firm claimed that several factors support its neutral outlook, including low VNB about EV, which restricts the potential RoEV to close to the premium-unwind rate, lower APE growth, and margin prospects in comparison to peers in the private sector, as LIC's higher commission costs and operating expenses restrict the potential for product and channel diversification.


As around 35% of non-par assets are in equity and there is no history of EV movement under the current fund split structure, another aspect is intrinsic volatility in EV, according to the note.


We utilize a 0.9x Jun'23 P/EV multiple to calculate our target price, which reflects a 10% discount on EV due to the EV's increased volatility and lack of growth history. Despite LIC's market-leading position and reasonable valuations, Emkay continued, "we favor private sector counterparts with superior growth and profitability prospects and greater RoEV potential.


Because of its monopoly in the single-premium group fund management sector, LIC's market share and several of its cost ratios are artificially inflated. Despite its enormous scale, its commission and operating expense ratios are on the higher side compared to more cost-effective larger private players. Its persistency and surrender ratios are not noteworthy when adjusted for the group single-premium business and LIC's nearly ULIP-less product mix, the brokerage added.

For the fourth quarter ending March 2022, the state-run insurance giant recorded reduced profits. In its maiden financial report following the listing of its shares, LIC reported a 17% reduction in its consolidated net profit for the fourth quarter, falling to Rs 2,409 crore from Rs 2,917 crore in the corresponding quarter last year. The insurer's overall revenue climbed from Rs 1,90,098 crore in the same period of the prior fiscal year to Rs 2,12,230 crore.


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