LIC shares: Kotak Institutional Equities, a domestic brokerage firm, maintains a positive outlook on Life Insurance Corporation of India (LIC) and anticipates a substantial potential upside of up to 44 percent in the stock from its recent lows experienced on Monday. Investor interest in the company has surged following the approval by the central government for wage revision for LIC staff.
Before Holi, the government approved a 17 percent increase in salaries for 1.10lakhemployees of LIC on Friday evening. Similar to the raise granted to public sector bank employees, the salary revision for LIC employees will take effect from August 1, 2022, as announced by the state-owned insurance giant.
According to media reports, LIC’s employees are set to receive a 17 percent salary increase starting from August 2022. Kotak Institutional Equities stated that estimating the impact on earnings at this point is difficult. They mentioned that there will be an annual increase in the wage bill amounting to Rs 4,000 crore. To provide context, LIC reported total salary expenses of Rs 40,000 crore in FY2023 and Rs 25,800 crore in 9MFY24.
LIC operates on a five-year wage cycle, meaning that wage levels are reassessed every five years. The previous pay scale covered the period from August 2017 to 2022. Therefore, wage hikes were scheduled for August 2022. “In FY2023, the corporation allocated Rs 2,100 crore for wage increases. With a projected total annual impact of Rs 4,000 crore, it seems that approximately Rs 2,000 crore has been accounted for,” Kotak stated.
On Monday, LIC shares experienced a decline of over 2.35 percent, falling to Rs 902.80, resulting in a total market capitalization exceeding Rs 5.75 lakh crore. This compares to the previous settlement of Rs 924.84 on Friday. The stock reached its 52-week high of Rs 1,175 on February 9, 2024, and is currently down approximately 23 percent from that peak.
The decreasing employee count at LIC is believed to lessen the impact of the annual wage bill over time, according to the brokerage’s estimation. LIC had 108,987 employees in FY21, which decreased to 104,036 in FY22 and further to 98,463 in FY23. Notably, overall employee expenses for LIC, inclusive of provisions for arrears, witnessed a 13 percent decrease in 9MFY24.
LIC stands as the foremost insurance provider in India, offering a diverse range of insurance products. These encompass participating insurance products and non-participating products such as unit-linked insurance, savings insurance, term insurance, health insurance, annuity, and pension products. The company entered the public market in May 2022, raising over Rs 21,000 crore through its IPO. – LIC shares
Kotak added, “We project employee expenses to account for 7-8 percent of LIC’s net premium, whereas total employee expenses represent nearly 102-121 percent of the company’s profit after tax (PAT). In contrast, private players typically have a 3-9 percent ratio of employee expenses to net premiums. Due to its substantial size, LIC’s impact on overall EV (Enterprise Value) may be relatively modest.”
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“The provisions made for wage hikes in the past four quarters mitigate the immediate impact while reducing the workforce bodes well for managing the wage bill over time. Meanwhile, the business momentum appears to be strong, indicated by a 5 percent increase in the market value of equity investments since December 2023,” it stated, assigning a buy rating and fair value of 1,300, implying a potential rise of 44 percent.
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