Investors must remember market rewards good performance

Life Insurance Corporation of India came up with its mega initial public offering (IPO) in the month of May to mobilize more than `20,000 crore. The government offloaded its stake to the extent of 3.5 per cent (22.13 crore shares). The issue price was `949 and the LIC of India was making a tall claim that its valuation is much more based on the embedded value, which is normally applied while valuing insurance business all over the world. But the issue price was steep high when compared with other Insurance companies based on the basis of book value and earnings per share. The market price is hovering around `620 of LIC now.

In an interview in June 2022, MR Kumar, Chairman, LIC said, “People should not be worried about immediate performance. The market is down for many other factors - the war, global risk-off in financial assets, monetary tightening. As the market improves, our share price will also improve. Investors should be patient.”

Meanwhile, JP Morgan initiated a coverage on LIC with an overweight rating and a target price of `840 for March 2023. JP Morgan said, “It is the cheapest stock in our insurance coverage at 0.75x FY23E EV (embedded value). 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 makes it too cheap to ignore on valuation, stated the brokerage. Motilal Oswal has put a target of `830 for the scrip. Mutual Fund holdings decreased from 0.80 per cent to 0.74 per cent in June 22 quarter and FII/FPI decreased holding from 0.22 per cent to 0.12 per cent in June 22 quarter.

It seems that the IPO valuation of LIC as well as the present valuation by research houses is based on the embedded value. Embedded value, by definition, is the sum of the net asset value and present value of future profits of a life insurance company. We must understand that the embedded value is only a best estimate. In the future, there may be differences between the assumptions used in the calculation and the reality.

With its advantages and disadvantages, the embedded value is a portion of a whole and it must be taken this way. This is another tool for the investment community, which in addition to price to book value, rate of return on equity, earning by source and price to earnings ratio, adds value to a company.

The investors must remember that the market always rewards good performance of companies and punishes the mediocre and poor performers. For the quarter ended June 22 the total income of LIC of India has fallen to `68070 crore from its previous quarter figure of `211325.61 crore.

When we make a comparison of LIC with other life insurers in terms of PE ratio, book value to price ratio and also dividend yield, we cannot be optimistic about the recovery of this scrip. As on October 3, 2022, Price Earnings Ratio of LIC of India is 83.08, whereas for ICICI Prudential it is 66.65 only. The Price to Book Value ratio for LIC of India is 37.70. For HDFC Life, ICICI Prudential and SBI Life, it was 7.02, 8.00 and 10.65 respectively.

(The author is a retired banker)