Markets are mispricing LIC stock, international research firm JP Morgan said in a report, after the counter fell sharply since its listing. The brokerage firm initiated a hedge on the stock with an overweight rating. The brokerage firm has set a target price of Rs 840 each, 30% higher than today’s low. However, the target price is still well below the listing and issue price. Earlier this week, the insurance stock hit an all-time low of Rs 650, against the IPO price of Rs 949 each.
JP Morgan was also a major contributor to LIC’s IPO. “We believe the market sees LIC as an equity market proxy and recent market weakness is overblown. We do not expect LIC to trade at private sector valuations of 2-3x P/EV (price to at intrinsic value), but our March 23rd price target of Rs 840 is based on 1x FY23 P/EV, which we believe is justified on an order book essentially by, excess assets on the B/S ( balance sheet) and a solvency ratio of 185%,” JPMorgan said.
Currently, the total market capitalization of LIC stood at Rs 4.26 lakh crore. However, at the offer price of Rs 949, the market capitalization of LIC was Rs 6.02 lakh crore. According to BSE data, the insurer is the seventh most valuable company by market capitalization, followed by State Bank of India (SBI) with a market capitalization of Rs 4.13 lakh crore.
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JP Morgan said LIC is trading at 0.75x FY23 price to intrinsic value based on FY23 earnings after a post-IPO correction that eroded the market capitalization of Rs 1.9 lakh-crore. LIC primarily worked in the national interest earlier. Its surplus was entirely distributed to policyholders (95%) and to the government (5% in the form of a dividend). The brokerage firm added that the regulatory change now ensures that LIC retains more profits. “FY22 profit was Rs 40 billion, +39% YoY. These changes were effective for 2H and this either to its full extent. The dividend payment was 23% (Rs 1.5/share). We estimate a conservative profit CAGR of 12% on FY22-25E,” he noted.
JP Morgan said that prior to the IPO, LIC’s operations were largely driven by par policies that allow for consistent cash flow. “Changes to the LIC Act prior to listing resulted in the separation of par and non-par funds with a revised policy of distributing surpluses in favor of the shareholder (95:5 to 90:10 by FY25). In addition, LIC is working on diversifying its product line into the margin-accretive non-peer segment,” he said.
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