LIC shares at Rs 1,300? Kotak sees up to 44% upside in the state-run insurer

Domestic brokerage firm Kotak Institutional Equities continues to remain positive on Life Insurance Corporation of India (LIC) and sees a strong upside of up to 44 per cent in the stock from its lows hit on Monday.

The company has been on the radar of investors after the central government okayed wage revision for LIC staff.

Ahead of Holi, the Centre had cleared a 17 per cent overall hike in salaries for 1.10 lakh employees of the LIC on Friday evening. The government cleared a similar raise for the employees of public sector banks, the salary revision for LIC employees is effective from August 1, 2022, the state-owned insurance behemoth said.

Media reports suggest a 17 per cent salary hike for LIC’s employees, with effect from August 2022. The impact on earnings is challenging to estimate at this stage, said Kotak Institutional Equities. There shall be an annual rise in wage bill of Rs 4,000 crore. To put this in perspective, LIC reported total salary expenses of Rs 40,000 crore in FY2023 and Rs 25,800 crore in 9MFY24, it said.

LIC has a five-year wage cycle. It means that wage levels are revisited every five years. The last pay scale was for August 2017-22. As such, wages were due to be hiked in August 2022. “The corporation made a provision of Rs 2,100 crore in FY2023 for wage hikes. As such, assuming Rs 4,000 crore of total annual impact, it appears to have provided about Rs 2,000 crore,” Kotak said.

Shares of LIC dropped more than 2.35 per cent to Rs 902.80 on Monday, commanding a total market capitalization of more than Rs 5.75 lakh crore. The scrip had settled at Rs 924.84 on Friday. The stock had scaled 52-week highs of Rs 1,175 on February 9, 2024 and is currently down about 23 per cent from those levels.

The falling employee count of LIC reduces the impact of the annual wage bill over time, the brokerage estimates. LIC had 1,08,987 employees in FY21, which declined to 1,04,036 in FY22 and further to 98,463 in FY23. Notably, overall employee expenses for LIC, including provisions for arrears, were down 13 per cent in 9MFY24, it said.

LIC is the largest insurance provider company in India. The company offers participating insurance products and non-participating products like unit-linked insurance products, saving insurance products, term insurance products, health insurance, and annuity & pension products. The company was listed in May 2022, when its raised more than Rs 21,000 crore from its IPO.

“We model employee expenses at 7-8 per cent of the net premium for LIC, while total employee expenses are almost 102-121 per cent of PAT. This compares with a 3-9 per cent ratio of employee expenses to the net premium for private players. Given its large base impact on overall EV may be low,” Kotak added.

“Provisions for wake hikes in the last four quarters dilute the one-time impact; reducing employee force augurs well to control the wage bill over time. In the meantime, business momentum seems to be holding on well, with the market value of equity investments up 5 per cent since December 2023,” it said with a buy rating and fair value of 1,300, suggesting 44 per cent rise.

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