Will LIC face selling pressure?

[00:00:00] Hey folks, CA Rachana Ranade here and I welcome you all to another episode of Finance Simplified,

[00:00:05] the podcast wherein we are going to discuss about a stock which came into line light in

[00:00:09] the last month mainly because of two reasons. So let's get started.

[00:00:14] The first one was about the income tax refund amount that the company got. You know people

[00:00:21] like you and me will get an income tax refund of what some people will get in 1000 rupees,

[00:00:26] some people may get in few lakhs, some people may get in few crores but for LIC of India

[00:00:32] the amount was how much? It was 21740.77 crore rupees. That was of course not for one year,

[00:00:40] it was for assessment years 2012, 13, 14, 15, 17, 18, 19 and 20. All these assessment

[00:00:48] years put together this was the income tax refund amount but this went viral on social

[00:00:53] media that how could an amount be so big right? So that was one reason why it came into line

[00:00:57] light. There was one more reason why this stock came into line light and which was

[00:01:01] Today, today LIC's share records are affected. Exactly. Now when people saw this news that

[00:01:13] okay it has hit an all-time high we need to understand when did it hit all-time high

[00:01:18] and what happened after that? When our Prime Minister, Honourable Prime Minister

[00:01:22] mentioned about LIC in his speech that was 7th of February right? And immediately on the

[00:01:28] next trading day that is on the 8th of February there was a gap up in this stock

[00:01:32] and the stock went almost 5.86% up. Immediately next day also it made a high

[00:01:37] of how much? High of almost 1175. So if you want to just have a look at how

[00:01:43] much was the gain from the close of 7th February till the highest point this is

[00:01:51] almost 12%. So the stock gained almost 12% in how much? In just two days. But what has

[00:01:57] happened after that from the topmost point to the bottommost point this stock

[00:02:02] has gone down by almost 23%. Okay now you must be wondering okay this happened

[00:02:09] after the speech is what we are discussing till now but when did the stock start to rally?

[00:02:14] So for that what we are going to do we will just try and understand this. This is somewhere

[00:02:18] around the month of November right? The stock rallied from here till the highest point

[00:02:23] this is of course on a daily candle that I am talking about but on a daily candle

[00:02:27] this stock was up by almost 90%. But now I have come to Nifty chart because

[00:02:32] we need to understand that okay LIC went up by almost 90% but did Nifty also

[00:02:38] rally in the similar timeframe. If you remember that was somewhere in the beginning

[00:02:42] of November that we talked about the LIC rally. Now here on the Nifty chart that

[00:02:46] the rally started somewhere around October end so it's a very similar time

[00:02:50] frame right be it October end or November first week or whatever. Yes

[00:02:53] Nifty has also rallied and so did LIC of India as well. Now we have to

[00:02:57] understand that what could be few reasons for that. Number one if you

[00:03:01] remember the whole rally one of the major areas where the rally was at

[00:03:07] the forefront was the PSU space and of course needless to say that LIC is in

[00:03:12] the PSU space. Number two LIC has a lot of holding in a lot of PSUs so the moment

[00:03:18] you can imagine other PSUs are rallying the overall investment value that LIC

[00:03:24] will have in these PSUs that is also going to go up and so the market

[00:03:28] value of the invested amount right that is also going to go up and it's going

[00:03:31] to be a positive factor for LIC. So it was this these dual reasons because

[00:03:35] of which LIC also got a nice push. Well we did discuss about how much

[00:03:39] investments LIC had in other PSUs but we also need to understand one very

[00:03:44] interesting point as to who holds majority holding in LIC and for that

[00:03:49] we're quickly going to go on screener and now if I go to the investors tab

[00:03:53] 96% 96.5% is held by President of India so clearly it's a PSU agree. Now

[00:04:00] here you can understand that okay if 96.5% is the holding what about the

[00:04:06] maximum public holding criteria isn't it 75% how come they are holding 96.5%

[00:04:11] you will understand that okay up to 75% criteria is applicable after

[00:04:17] three years of listing so basically the free float criteria of 25% that

[00:04:23] will start post three years of listing but what because LIC is having

[00:04:27] a larger market cap that is why the five years criteria will be applicable

[00:04:31] for LIC but wait it's not even five years you will understand that for LIC

[00:04:35] a specific exemption has been made and for LIC the criteria is up to ten

[00:04:41] years post listing so what 2032 will be the time frame where you will

[00:04:48] the government will have to ensure that their holding is pulled down

[00:04:51] from 96.5% to 75% in simple words I hope you have understood that

[00:04:56] there is no immediate selling pressure that can come up in LIC of India

[00:05:00] having said that I hope you have understood the basic context of this stock

[00:05:04] now we need to understand some positives as well as some negatives on this stock

[00:05:08] now let's try and understand certain positive points about this company

[00:05:11] whatever base I have taken for all the figures that I am going to present

[00:05:15] majority of them is nine month ended data nine months FY24 and I'm going to

[00:05:19] compare that with nine months ended FY23 in certain cases I may compare the

[00:05:22] half yearly data as well ok so let's go one by one let's understand some

[00:05:26] important financial matrices the very first one is profit after tax if I'm

[00:05:30] comparing the profit after tax nine months ended data FY24 versus FY23 that

[00:05:34] has increased by 17.16% clearly that shows that how the company

[00:05:39] is focusing on increasing the profitability of the company

[00:05:42] if you check at the solvency ratio that it has improved by 0.08 there are

[00:05:46] two categories of on yield of investment one is a policy holders fund

[00:05:49] and one is shareholders funds whatever I'm talking about be it policy holders

[00:05:53] fund or shareholders funds both have increased by 0.56% and 2.74%

[00:05:57] respectively going on to one more important matrix which is assets

[00:06:01] under management and if I'm talking about the nine month ended data it has gone up

[00:06:04] by 11.98% and if I'm talking about the half year data it has gone up

[00:06:08] by 10.47% now why could the asset under management may have gone up

[00:06:12] there could be two reasons for that possibility number one is whatever premium

[00:06:16] they are collecting they might have invested that and that is the reason why

[00:06:19] the AUM increased possibility one or possibility number two you know that

[00:06:22] already I told you in the previous section of overall PSU space was rallying

[00:06:26] all as a bunch right that could also lead to the increase in AUM right

[00:06:31] moving on to one more very interesting matrix and that is typically seen only

[00:06:36] in insurance companies that is the EV that is the embedded value now if you are not

[00:06:40] aware about how different terms in the insurance sector are to be

[00:06:44] understood are to be interpreted I hope you are aware about something called as

[00:06:48] pro investor membership I have this on my YouTube channel as well where you just hit the

[00:06:52] join button and you subscribe for the pro investor membership a similar

[00:06:55] pro investor membership is also available on our website rachnaranade.com

[00:06:58] this is a membership where I help you understand as to how you can analyze

[00:07:03] companies from different different sectors and there are certain sectors

[00:07:06] where the matrices also differ based on the different sector so if you want to

[00:07:10] understand knowledge don't hesitate to join the pro investor membership right

[00:07:14] but just to get back to our discussion if I'm talking about embedded value just to

[00:07:18] simplify this I'm sure you know about enterprise value okay so enterprise

[00:07:22] value and embedded value are similar to each other I'm not saying they are same obviously not

[00:07:26] but they can be kind of comparable okay for insurance sector it would be

[00:07:30] embedded value it is also continuously on an increasing trend and as per the latest

[00:07:34] available data as at 30th September 23 that is going up to 6.62

[00:07:38] lakh crores right that's a big number again now having said all of I mean

[00:07:42] we talked about a lot of points that the financials the various matrices

[00:07:46] are showing a good sign right but the big question is that with

[00:07:50] improving numbers has a valuation also skyrocketed

[00:07:54] and typically again in case of insurance companies market cap to

[00:07:58] embedded value is what is a matrix very important matrix that is seen

[00:08:02] in insurance companies so how will I tell whether this valuation

[00:08:06] is comparatively lower or not for that I'll have to compare the valuation with other peers

[00:08:10] okay I understand that the peers that I'm going to tell you are some are from

[00:08:14] the private space as well as via life HDSE life or ICI say proof

[00:08:18] all the M cap by so market cap by Indian embedded value

[00:08:22] these stand at more than two whereas if I'm talking about LIC that's

[00:08:26] less than one it's just at 0.87 so definitely the valuation is lower as compared

[00:08:30] to its peers when one more very interesting data point the non-par

[00:08:34] share which was 9.45% nine months and the data

[00:08:38] 23 that has gone up to 14.04% now why

[00:08:42] am I so happy with this what is this non-par concept okay non-par means

[00:08:46] non-participating par is participating participating in what

[00:08:50] participating in the profits of the company now I'll give you a very simplified

[00:08:54] example so that you understand the importance of non-par assume that if I

[00:08:58] go add if I go for a LIC car policy okay some insurance

[00:09:02] policy possibility number one they can say that okay Roshna the maturity value

[00:09:06] of this policy will be XYZ rupees whatever is the amount possibility

[00:09:10] number two they may say Roshna the maturity value will be XYZ rupees

[00:09:14] plus bonus if applicable okay if

[00:09:18] the point is plus bonus it means that you as

[00:09:22] a policy holder are participating in the profits of the company

[00:09:26] good for you good for people like you and me who will be the policy holders

[00:09:30] but bad for LIC why because then they'll have to shell out some

[00:09:34] profit that they are getting to the policy holders okay they'll be happy for the

[00:09:38] policy holders but profitability is more to decrease a little bit right

[00:09:42] so if more and more non-par policies are sold will that

[00:09:46] be a positive sign for the profitability of the company answer is yes and that is why I'm so

[00:09:50] happy when I'm saying that it has gone up from 9.45% to 14.04%

[00:09:54] right of course all these points again I've

[00:09:58] dug down in detail in the pro investor membership so yeah

[00:10:02] you can definitely check that out that I was out you can check that out

[00:10:06] as well okay going back to one more point VNB that is value of new

[00:10:10] business now what is this again it's nothing but a measure of

[00:10:14] profitability for the new policies sold during the year okay

[00:10:18] whatever policies are sold whatever

[00:10:22] profit I expect future profits throughout the life of the policy

[00:10:26] whose present value is taken so it's the present value of the future

[00:10:30] profits that I'm going to derive from that policy that is nothing but VNB

[00:10:34] okay value of new business again if you don't understand this just understand one point or

[00:10:38] remember one point higher the better okay what is the margin

[00:10:42] it has gone up from 14.6% to 16.6% and if I'm talking about

[00:10:46] net VNB in numbers it has gone up from 5478

[00:10:50] to 5938 and both these are rupees in

[00:10:54] the course right so I hope you have understood about the VNB point as well

[00:10:58] but there is one more slide which is a part of their investor presentation

[00:11:02] which tells us the reason for increase in VNB margins and there are

[00:11:06] two three reasons why the VNB margins have gone up and down okay

[00:11:10] impact of business mix 4.9% upwards impact of product benefit

[00:11:14] 3.6% downward but there's also one more point impact of assumptions

[00:11:18] if the assumptions change their margins can also change in whatever direction upward or downward

[00:11:22] because of assumption only 0.7% it has increased okay now moving on to the

[00:11:26] last point about the positives it is about the improvement in persistency ratio

[00:11:30] see what do we mean by persistency if I have like if I've opted for

[00:11:34] a 30 year long policy and if I've opted for a yearly premium

[00:11:38] ideally I should be paying premium on a year-on-year basis what if I stop

[00:11:42] after like six years seven years that means I was I'm not persistent

[00:11:46] in paying the premiums right higher the persistency

[00:11:50] what it is going to be and what is the case of LIC in the 13th month

[00:11:54] it has it is up it is at almost 78%

[00:11:58] but if you see 21st month 25th month it goes to 71.92%

[00:12:02] and if you check out the 61st month it has gone down to 62.4%

[00:12:06] but that's not how you analyze it okay because ideally it is in a decreasing trend

[00:12:10] as and how the number of years keep on increasing you should compare it on a

[00:12:14] year-on-year basis right 9 months 24 versus 9 months

[00:12:18] 23 and every single parameter be it 13 month

[00:12:22] 78 it's higher as compared to 77.61 25th month 71.92

[00:12:26] higher as compared to 71.32 you you can just check majority

[00:12:30] of the cases not all cases but majority of the cases it is higher as compared

[00:12:34] to the previous year so I hope you have understood a lot of positive points about this company

[00:12:38] now let's understand certain negatives of course same thing

[00:12:42] I'm going to compare 9 months and a data Fy 24 as compared to 23

[00:12:46] total premium collected that itself has dropped by 5.69%

[00:12:50] that's a big number right total group business premium that has gone down

[00:12:54] by 20.28% even individual new business premium has

[00:12:58] gone down shade lower by just 0.38% market share

[00:13:02] in the premium has gone down by 6.48% and market share in the policies

[00:13:06] has gone down by 2.29% now if you remember in the previous

[00:13:10] section I did talk about the fact that yes their profitability is going up

[00:13:14] agreed but if your total premium collection itself is going down

[00:13:18] then the sustainability profit of profit can be put at question

[00:13:22] okay so I hope you have understood the importance of this there's also one more important point

[00:13:26] that we need to understand in case of insurance companies and that is annualized premium

[00:13:30] equivalent you can also very easily understand that total annualized premium

[00:13:34] equivalent that has gone down by almost 4.67%

[00:13:38] now for those who don't understand what is the meaning of annualized premium equivalent

[00:13:42] and explain this very quickly see if you can grasp this

[00:13:46] if I want to compare premiums of this year as compared to previous year

[00:13:50] could there be a possibility that premiums can be collected in two ways

[00:13:54] possibility number one premium is collected on a yearly basis

[00:13:58] possibility number two it's a bullet payment what do we mean by bullet payment

[00:14:02] you pay only once and you are covered for 25 years

[00:14:06] now can I compare two years premiums

[00:14:10] actually I will give you, let me go into the teachings on now let us say this is financial year 23

[00:14:14] and this is financial year 24

[00:14:18] now assume that in the previous year whatever premiums were collected I am doing this for simplicity

[00:14:22] of understanding whatever premiums were collected in the previous year all were yearly premiums

[00:14:26] okay and that amount was let us say 102 rupees

[00:14:30] this year 100 rupees worth premium

[00:14:34] was such which was yearly premium

[00:14:38] that was one policy sold for 10 years 10 year

[00:14:42] and for which 10 rupees premium was collected okay so what is the total

[00:14:46] total is 110 now what will I can actually imagine this like

[00:14:50] sadharan tikia and vim tikia or something like that so sadharan

[00:14:54] content consumer and c err content consumer you have to understand the difference right

[00:14:58] so here sadharan can say it has gone up from 102 to 110

[00:15:02] very nice array wait we have to also understand a pe

[00:15:06] for that what you do is typically you compare the equivalent

[00:15:10] of a year so I am just trying to simplify this 10 for 10

[00:15:14] years 10 rupees premium is collected for 10 years so for 1 year how much

[00:15:18] this is 8 standard algebra so for one year it is going to be only 1 rupees

[00:15:22] so what will be the APE tell me it will be 100 plus not 10 it will be 100 plus

[00:15:26] 1 and that is why it will be 101

[00:15:30] and in the previous year what assumption had we taken that it is only yearly so 102

[00:15:34] 101 so in fact what has happened that it has gone down

[00:15:38] and what would sadharan tikia do they would have said array it has gone up

[00:15:42] okay so I hope you are understanding the importance of this concept of

[00:15:46] what annualized premium equivalent that is APE simple lilya

[00:15:50] okay fantastic thank you for joining us on this episode of finance

[00:15:54] simplified I hope you enjoyed listening to this podcast and also found some value

[00:15:58] in it if you did don't forget to share it with your friends and relatives till then take care

[00:16:02] Jai Hind