Can LIC's 17% wage hike derail the rally for 29 lakh shareholders?

The shares of Life Insurance Corporation of India (LIC) made a smart comeback from recent lows. The stock, which was struggling in the past month, surged 6% to Rs 972 in the first session of FY25, pushing the shares of India’s largest insurer back above the IPO price of Rs 949.

The stock’s record-breaking rally came to a halt after the insurer gave the green light to raise wages by 17% for its one lakh employees.

The wage revision is without a doubt good news for the 1.10 lakh LIC employees, but the 29 lakh shareholders will be staring at the company’s bottomline, which could see the annual implication of around Rs 4,000 crore, taking the total wage bill per year to Rs 29,000 crore.

“It’s important to note that LIC operates on a five-year wage cycle, meaning wage levels are reassessed every five years. In FY2023, LIC made provisions for Rs 2,100 crore for wage hikes, indicating that a significant portion of the expected hike was already factored into its pricing,” said Santosh Meena, head of research at Swastika Investmart.

He added that some profit booking within the PSU basket also led to the correction.

LIC shares have risen 79% in the last year but have corrected 6% in March, taking year-to-date gain to 13%.

“Increased employee expenses due to the wage hike could pressure profit margins, making LIC less attractive to investors,” believes Sonam Srivastava, smallcase manager and founder at Wright Research.

LIC, which is the largest domestic institutional investor in the Indian stock market, was also in the headlines for the front-running case. Sebi confirmed the involvement of one of its employees in a case of a big client’s trades. Following this, LIC fired the accused employee Yogesh Garg.

Srivastava said that if the front-running case is proven, it could damage investor confidence in LIC’s governance and transparency, potentially leading to a decline in stock price. “The severity of the impact (on the stock) will depend on the final wage hike amount and the outcome of the front-running case investigation.”

Meena, however, suggests that the case is unlikely to exert any notable impact on the share price.

Stock Outlook

Vishnu Kant Upadhyay, Assistant Vice President, Master Capital Service

Long-term prospects are promising for the Indian insurance industry. Increased awareness of financial security and rising disposable income could boost the market adoption of insurance products, given its strong position in the market.

The current levels may present an opportunity for long-term investors with diversified portfolios that prioritise the insurance sector’s potential and the fundamentals of LIC.

Sonam Srivastava, smallcase Manager, Founder at Wright Research

For the long term, the Indian insurance sector holds promise. Rising disposable income and increasing awareness of financial security could drive insurance product penetration. LIC, with its dominant market position, could benefit from this growth. However, factors like government regulations, competition, and LIC’s ability to adapt to changing market dynamics will influence its long-term performance.

In the short term, the stock might experience volatility depending on market conditions and the resolution of the front-running case. For the long term, the outlook hinges on LIC’s ability to improve profitability, capture market share, and adapt to the evolving insurance sector. Investors should closely monitor LIC’s performance, industry trends, and broader market movements before making any investment decisions.

Santosh Meena, head of research at Swastika Investmart

We maintain a bullish outlook on LIC, viewing the recent correction as a favourable buying opportunity. The business momentum appears robust, and there has been a substantial increase in the market value of equity investments in recent times. As such, we have set a 6-month target of Rs 1,200 for this counter.

Global brokerage JPMorgan upgraded LIC to overweight from neutral in March and raised the target price to Rs 1,340 from Rs 690 earlier.

Among domestic firms, Kotak Equities raised its target price for the stock from Rs 1,040 to Rs 1,300, while Emkay Global‘s target has now increased to Rs 1,200. Religare has upgraded the stock to accumulate from hold with a revised target price of Rs 1,232.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)

Harry Byrne

Related post