Shares of Life Insurance Corporation (LIC) of India rose nearly 4% in intraday trade on Tuesday after Kotak Institutional Equities initiated coverage on the insurance behemoth with a ‘buy’ rating. The brokerage has given a target price of ₹1,000 apiece, a potential upside of 40% from the current market price, citing that LIC’s valuations largely ignore its strengths such as market dominance and cost leadership.

Boosted by the brokerage’s bullish outlook, shares of LIC of India gained as much as 3.9% to hit an intraday high of ₹737 on the BSE, while the market capitalisation rose to ₹4.64 lakh crore. Earlier today, the insurance stock opened 1.1% higher at ₹717.30, against the previous closing price of ₹709.35 on the BSE. The stock finally settled day’s trade at ₹734.85, up 3.6%. In comparison, the BSE benchmark Sensex moved in a narrow range, ending 126 points higher at 61,294 levels.

The share price of LIC currently trades 20% lower than its all-time high of ₹920 touched on its market debut on May 17, 2022, while it is down 22.5% against its initial public offering (IPO) price of ₹949. LIC is one of the worst-performing initial public offerings (IPO) of the last year, eroding investors’ wealth by ₹1.4 lakh crore as market capitalisation dropped to ₹4.6 lakh crore as compared to the valuation of around ₹6 lakh crore during the listing.

As per Trendlyne data, 10 analysts have offered long term price targets for LIC of India at an average target of ₹865.67, an upside of 18% from the current market price. However, the target price given by Kotak Institutional Equities is 15% higher than the consensus estimate of 10 brokerage houses.

Kotak in its report said LIC’s dominance is unparalleled in the Indian life insurance sector, with 37% APE (annual premium equivalent) market share in FY22. “The high productivity (15.4 policies/year per agent versus 0.9-4.2 policies/year of its private peers) of over 1.33 mn agents (54% of life insurance agents in India) remain the bedrock of LIC’s market dominance and cost leadership. The gradual shift in the product mix in favor of non-par should boost VNB growth, despite moderate APE. Account bifurcation led to a large increase in EV and earnings, even as RoEV was depressed. We believe LIC’s valuations largely ignore its strengths; initiate with BUY; FV of ₹1,000,” the report noted.

“LIC’s margin expansion, driven by the shifting of the product mix by its unparalleled agency force, should boost VNB growth, even as overall medium-term APE growth will likely to be lower than private peers. The large unrealised equity gains (59% of FY2022 EV) should also support LIC’s EV but make it leveraged to capital market movements,” it added.

The brokerage expects LIC to deliver a VNB (value of new business) CAGR of 18% in FY23-25E owing to an APE CAGR of 13% and 180bps margin expansion. However, competition from private players and corrections in the equity market can pose a significant risk to LIC’s stock performance, it added.

Despite ceding share to private players, LIC holds around 37% market share in individual APE in FY22. Its enormous agency franchise remains the cornerstone of its success, driving 96% of individual NBP in FY22. Moreover, the high productivity of its agency force, coupled with the benefits of scale, drives cost leadership, while listed private peers largely depend on banks (44-65% of individual NBP) to drive their business, Kotak says in its report.

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