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LIC reported broadly in-line numbers in H1FY24, owing to weaker growth, strong boost in embedded value led by equity-market performance, and part provision on account of increased family pension liabilities. We continue to perceive that structural challenges—such as slower growth-led market-share loss, sticky operating expenses, and higher sensitivity to equity market-led EV volatility—are likely to cloud LIC’s outlook. However, LIC is currently trading at ~0.50x Sep-25E P/EV, with the structural challenges and a possible share sale by the government already in the price. We upgrade the stock to BUY, as we believe higher surplus generation and slower growth could lead to a step jump in dividend, as solvency is healthy. Our fair value Sep-24E TP is Rs760/share (offering 25% upside), and we value the shares at 0.63x Sep-25 EV (Cost of Equity: 13%; Operating RoEV: 10%; Single Stage Growth: 5%).

LIC: Financial Snapshot (Standalone)

Weaker growth, strong equity market-led EV boost and another pension drag

LIC reported largely in-line results, with some surprises on EV and GAAP PAT being driven by the stronger equity market-led economic variances and an increased family wage-led ~Rs 27bn provision in Q2FY24 (total cost: ~Rs110bn). The slower growth (H1FY24 APE: -10% YoY) was largely acknowledged, and was led by the 25% YoY decline in the Group business and a flat YoY Retail business. On the VNB front, margins for H1FY24 at 14.6% were flat YoY and came slightly better than our estimates of 14.2% driven by a YoY improvement of 1.7ppts in Group VNB margin, led by the changed profile of the group product mix. Persistency ratios were largely stable and OpEx sharply surged on account of the Rs27bn provision for increased family pension and a likely contribution to pension liabilities on account of actuarial valuation-led changes (Exhibit 1).

Weaker growth and sticky OpEx cloud the long-term outlook

Despite the massive scale advantage, LIC’s cost structure (commission and OpEx adjusted for minimal cost-incurring group businesses) is bloated. And that has constrained Company’s ability to sell non-par savings or ULIP products. Now, as it targets selling more of non-par (savings, annuity and protection) products and ULIPs, it will need to offer competitive pricing and returns to customers; this is hence driving the adverse impact on VNB margin (a 4.3ppt negative impact on H1FY24 VNB margin). Overall, we continue to see LIC’s cost problem and heavy dependency on individual agents limiting its growth, and the gradual market-share loss in the Individual business persisting.

Upgrade to BUY; value LICI shares at 0.63x Sep-25 EV

Currently trading at 0.5x Sep-25E P/EV, LICI shares are already more than pricing-in the structural challenges. Given that LICI’s operating RoEV (~10%) is lower than the cost of equity, we do not value it using the appraisal value methodology, but continue to value it using the P/EV multiple. Considering 13% Cost of Equity (k), Operating RoEV of 10% (r), and single stage growth rate of 5% (g), we drive our target multiple of 0.63x Sep25E P/EV to set our Sep-24 TP of Rs760/share. Downside risks: 1. Prolonged lack of clarity on dividend payout. 2. Share supply glut on account of OFS by the government of India; 3. Sharp correction in equity markets adversely impacting the embedded value.

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