Will franchise value of LIC get recognised in 2023? Deepak Shenoy explains

“There seems to be a big gap between what LIC is valued at and what any other life insurance company in India is valued at. Part of that gap can be explained by the fact that it is a government-owned company,” says Deepak Shenoy, Founder, Capital Mind

Do you see a franchise value of LIC getting recognised in 2023? Could this year belong to LIC and could it at least go back to its IPO levels?
I am very biased. One of our largest positions is LIC. The reason we have it is because we believe here the market does not have too much of a history. It became a company only in January 2022 and literally it has just one year operational history as an actual shareholder based company. Otherwise, it has largely been a policyholder-run company.

As a policyholder company, it did not need to maximise shareholder value and so they did not have a lot of the things that the other insurance companies have in place. For instance, if you buy a term policy or an annuity or something like that, any profits generated by the investment that LIC makes on the money that you give it, only a part of it is shared back with you as annuity or even in term insurance. The rest is actually profit that belongs to the shareholders. This is not something that LIC ever practiced earlier. All that profit was available as the larger pool to policyholders. 95% of it was shared among policyholders.

Now that they have split the shareholder and policyholder accounts, 100% profits of this non-participating pool will accrue to shareholders the excess is significant. It is Rs 5,000 crore per quarter and that would give it about Rs 20,000-25,000 crore as a profit pool and it is valued at Rs 400,000 crore. Also insurance companies do not pay taxes in India. So effectively this is a fairly low priced play for what is India’s largest market share company and that is actually increasing.

There seems to be a big gap between what this company is valued at and what any other life insurance company in India is valued at. Part of that gap can be explained by the fact that it is a government-owned company, but otherwise yes.

Wanted your take on the entire auto sector? Today Ravi Dharamshi said a case can be made for the Mahindra Group. What is your take?
We call it the Mahindra Group but M&M is this conglomerate of the holding company which owns Tech Mahindra and Holidays and Mahindra Life and a bunch of other companies and you also have the auto company which has been doing really well. In December, they have done fairly well both on the passenger vehicle and commercial vehicle fronts.

I think in auto, major part of the business is quite exciting. The holding company will always get a discount. So, sum of the parts to me even now adds up to more than the whole. Again a disclosure, we own the company and we are a little biased there.

M&M has the potential in case interest rates continue to rise and they have a solid balance sheet that allows them to both back stop their own companies if there is trouble but also be in the line to purchase other companies, where there is some kind of distress given that it is probably a longer term play for 5 to 10 years. But I like the company; we own the stock thoughbthe near term may not be as exciting as the five- to ten-year horizon.