Buy Life Insurance Corporation of India Ltd For Target Rs. 1000 By Yes Securities Ltd
Upgraded after 2Q, LIC continues to enhance margin but growth performance disappointing
Our view – Only Non-Par basket grows, driven by ULIP business
VNB margin -
Calculated VNB margin improved on sequential basis as LIC redesigns products, adjusts commission and continues to enhance product mix: The VNB margin for 3QFY25 was 19.4%, down -65bps YoY but up 149 bps QoQ. The VNB margin for 9MFY25 was 17.1% compared with 16.6% in 9MFY24, up 50bps YoY. Change of product design and change in product mix were the key factors that led to the 50 bps expansion in VNB margin on YoY basis. Mix of business has been an important factor with rising share of Non-Par business having a positive impact. The decline in risk free rate has had a negative impact of 210 bps on margin, whereas product mix has had a positive 240 bps impact. With regard to product design, there has been a revision of premium rates on some products but not where the company already had a good margin. Apart from changes to product design, commission rates have also been realigned.
Stock performance
APE growth –
Growth performance was weak in a worsening of performance compared with 2Q: Total APE has de-grown -24.4% YoY and -39.6% QoQ to Rs 99.5bn in 3QFY25. Individual Non-Par segment was the only broad segment to grow at 18% YoY, driven by ULIP, which nearly tripled YoY, up 198.5%. Group business APE degrew -18.5% YoY for the quarter whereas Par continued its downward trend, lower by -38.2% YoY. In 2Q, total APE has grown 25.7% YoY and 42.4% QoQ to Rs 164.65bn, which could be regarded as a somewhat high base but, overall, growth performance was disappointing.
We maintain a recently assigned BUY rating with a revised price target of Rs 1000:
We value LIC at 0.6x FY26 P/EV for an FY25E/26E/27E RoEV profile of 11.1/11.4/11.6%. We had upgraded LIC in our 2QFY25 result report but had placed it below MFS and SBIL in our pecking order for the life insurance space.
Other Highlights (See “Our View” above for elaboration and insight)
* VNB growth: VNB de-grew -34.5%/-26.9% QoQ/YoY to Rs. 19.26bn, sequentially driven lower by decrease in total APE.
* Expense control: Expense ratio fell by -10/-206bps QoQ/YoY to 13.5%, where QoQ the opex ratio was down -23bps and comm. ratio was up 13bps.
* Persistency: 37th month ratio fell -14/-18bps QoQ/YoY to 67.1% whereas 61st month ratio rose/fell 38/-56bps QoQ/YoY to 61.8%
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