Life Insurance Corporation (LIC), India’s largest life insurer and public sector undertaking (PSU), has achieved a historic milestone by crossing the Rs 1,000 per share mark for the first time on Monday, February 5, 2024. The stock hit an all-time high of Rs 1,028 per share, registering a gain of 8.8% in the current trading session. With this, LIC has become the most valuable PSU in India, overtaking State Bank of India (SBI), and the sixth-largest listed company in terms of market capitalization, which stands at over Rs 6.5 lakh crore.
What is driving LIC’s stellar performance?
LIC’s shares have been on a strong uptrend since November 2023, when they gained 12.83%. The momentum continued in December and January, with the stock rising 22.52% and 14%, respectively. On January 23, 2024, the stock crossed the IPO price of Rs 949 per share for the first time since its listing in May 2022. Since then, the stock has been hitting new record highs almost every day.
There are several factors behind LIC’s impressive rally, such as:
- The revival of growth in FY25, owing to a favorable base and widening of product offering. LIC reported a 17% year-on-year growth in new business premium in Q3FY24, compared to a decline of 10% in Q3FY23.
- The strong embedded value (EV) growth on account of buoyant equity markets. LIC’s EV increased by 28% year-on-year to Rs 9.7 lakh crore as of December 31, 2023, driven by a 36% increase in the value of in-force business (VIF). LIC’s VIF is highly sensitive to equity market movements, as it has a large exposure to equities (around 20% of its assets under management).
- The hope of a step jump in dividend payout, as LIC is expected to declare an interim dividend for FY24 along with its Q3 results later this week. LIC has not paid any dividend since its listing, as it had to comply with the minimum solvency ratio requirement of 150%. However, with the improvement in its solvency ratio to 161% as of December 31, 2023, LIC may be able to reward its shareholders with a dividend.
- The exemption from complying with the minimum public shareholding (MPS) norms till 2032, granted by the finance ministry in December 2023. This reduces the possibility of an offer for sale (OFS) by the government, which holds a 96.5% stake in LIC. According to the Sebi rules, all listed companies have to maintain a 25% public float within three years of listing (or five years for companies with a post-issue market capitalization of over Rs 1 lakh crore). However, LIC has been given a special dispensation to meet this requirement over a period of ten years.
Should you invest in LIC shares?
LIC is undoubtedly one of the most dominant players in the Indian life insurance industry, with a market share of over 70% in terms of new business premium and over 80% in terms of policies sold. It has a strong brand equity, a wide distribution network, a loyal customer base, and a diversified product portfolio. It also enjoys a sovereign guarantee on its policies, which gives it an edge over its private sector peers.
However, LIC also faces some challenges, such as:
- The increasing competition from private insurers, especially in the protection and annuity segments, which offer higher margins and lower capital requirements. LIC’s protection market share has declined from 85% in FY17 to 65% in FY23.
- The high operating expenses and low persistency ratio, which affect its profitability and return on equity (ROE). LIC’s operating expense ratio was 13.6% in FY23, compared to an average of 11.4% for private insurers. Its persistency ratio (the percentage of policies that remain in force after a certain period) was also lower than the industry average across all time horizons.
- The regulatory uncertainties and policy changes that may impact its business model and valuation. For instance, the recent introduction of standard products for term insurance and annuity by IRDAI may reduce LIC’s pricing power and differentiation. Similarly, the proposed changes in the taxation of life insurance policies may affect its attractiveness as an investment avenue.
Given these factors, investors should be cautious while investing in LIC shares and evaluate them based on their risk appetite, return expectations, and time horizon. LIC shares are currently trading at a price-to-EV multiple of 0.67x, which is lower than the average of 1.8x for private insurers. However, this also reflects its lower growth and profitability prospects compared to its peers. LIC’s ROE was 9.8% in FY23, compared to an average of 18.4% for private insurers.
Therefore, LIC shares may not be suitable for investors who are looking for high growth and returns, but may appeal to those who are looking for a stable and dividend-paying stock with a long-term perspective.