LIC balance sheet: should the small investor keep his shares?
Anand is a middle-aged investor who was enthusiastic about participating in the IPO of LIC of India. A long-time LIC insured, he had taken out insurance as part of the protection plan.
He was attracted by LIC’s claim that the offer price was low compared to the price based on the intrinsic value of the business. When LIC offered a Rs 60 rebate to policyholders, they were eager to subscribe to the show. It secured an allocation at Rs 889 against the issue price of Rs 949.
Kavita was also convinced by LIC’s IPO valuation metric. She participated as a retail investor and secured an allocation at Rs 904 per share after a discount of Rs 45.
Also Read: Why LIC’s IPO May Not Be As Attractive As Claimed
Many small investors like Anand and Kavita were disappointed when the stock traded at a discount on opening day. On subsequent trading days, the stock slowly declined, and on June 1, the closing price was Rs 810.40. On June 6, LIC’s share price fell further to Rs 777.35 at the NSE. On June 7, it fell to a new low and closed at Rs 753.
Also Read: LIC Shares Hit New Low Monday; could go further south, experts say
It is unfortunate that a public issue by an institution owned by the Indian government has set an unreasonable price for the issue, which has led to the disappointment of many small investors. Compared to the shares of other private life insurers traded in the market, there could have been a more reasonable price for the issue.
While it is up to the individual investor to decide whether to hold or sell an investment based on their risk appetite, investment time horizon, financial goals, etc., here is an attempt to understand the situation current.
Recent work results
LIC’s financial results for the quarter ended March 2022 are out. It reported a net profit of Rs 2,409 crore for the quarter, down 17.41% from Rs 2,917.33 crore in the same period last year. The company’s net profit for the full year was reported at Rs 4,043.12 crore, 39.4% higher than Rs 2,900.56 crore in FY21. Although the overall annual result showed an improvement, the result for the last quarter was not encouraging.
Also Read: Grossly Undervalued, LIC’s Most Controversial IPO Ever
In this regard, it is important to note the statement of LIC Managing Director, Raj Kumar, that LIC will match the profitability of its private sector counterparts over the next five years. LIC’s investment return fell to 8.55% in FY22 from 8.69% in FY21. It is the largest asset manager in the country with assets of Rs 42 trillion; therefore, even a small increase or decrease in yield matters a lot.
Earnings per share (based on income)
The shareholding structure of LIC is as follows: out of a total of 6,324,997,701 shares, the government holds 6,103,622,781 shares and the public holds 221,374,920 shares.
When we factor in the net profit of Rs 4,043.12 crore, the earnings per share stands at Rs 6.39.
When we take the market price of the share at Rs 810 (as of June 1, 2022), the Price to Earnings (PE) ratio stands at 126.76.
Let’s compare how the market has rated other life insurance companies in terms of PE ratio. ICICI Prudential’s PE ratio is 103.77, HDFC Life is 96.68 and SBI Life is 76.59.
So even after the price drop, the price of LIC in terms of PE ratio is higher. Even if the highest valuation given for ICICI Prudential Life is taken into account, the LIC share price is expected to be only Rs 660 compared to the current market price of Rs 810. Is there any justification for the higher LIC share price?
When we compare the market valuation of general insurers by government entities and the private sector, we again find that the market still discounts public general insurers. For public banks and private banks as well, the market valuation is similar and public banks are quoted at a discount to the PE ratio.
Price at book value
Even in terms of the price-to-book ratio, LIC’s stock price is pretty high. While LIC is quoted at 40.72 times its book value, HDFC Life is only at 10.17 times. All other life insurers are rated even lower.
Also Read: Q4 LIC Earnings Drop 17% to Rs 2,409 cr; declares a dividend of Rs 1.50 per share
On a comparative basis, when the book value is around Rs 20, if the highest valuation, as in the case of HDFC Life, is taken, then the price rises to Rs 203 only.
It is true that the PE ratio or the price to book value cannot be the only criteria to determine the value of a stock. There may be other reasons to believe that in the future there could be more business growth, earnings growth, unlocking potential valuation, etc. But in the case of LIC, there is no such reason in sight; more so when the CEO of LIC says it will take five years to match the profitability of private insurers.
The individual investor should consider all of these issues. The last call, of course, belongs to him.
(The author is a retired banker.)