#38 Nifty aiming 26,000? and What's Embedded Value
23rd June'25 - 27th June'25
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`Money makes money and if you keep playing this loop, you will escape the rat race`
Markets and Macros
NIFTY50 has made a big stride last week of more than 2.5% gains last week. Looks like the ceasefire between Israel-Iran was the reason of this, but there are a lot of triggers in my opinion.
All major sectors have ended positive this week and only Gold has corrected. Well it has been a great ride for Gold.
But after the cease fire, do you think that this rally would sustain its potential and there won’t be any correction? I guess there are potential triggers in July which would give us more clarity about it.
US-India Trade Deal
Mutual Funds getting into equities.
US-China Trade Deal
I feel RBI’s efforts to increase liquidity in the market has gone too far. Their push to increase liquidity has gone far ahead of the limits in my opinion. We are still expecting 2 more rate cuts in this year and recent CRR and PCR reductions are way too many consumption growth triggers. We might see inflation creeping in again soon. But, yeah i know its a cycle but salaries of common man are not increasing as inflation is.
Stock markets anticipates the future and then prices it in. And there are too many growth triggers. It is said that the US-India trade deal is going to lead another growth story and when mutual funds start entering into the market, it should trigger another rally. So are we heading towards 26,000 Nifty? In short term i don’t know, but in mid term its a definitely yes. In my opinion, we are up for some more consolidation.
Mutual funds are taking positions as they feel that there could be another rally in the coming quarters. Recently, a famous mutual fund house has entered Dixon Technologies. If you have been tracking Dixon or having any position i hope you know at what PE it is trading and for me, it feels very expensive. Not sure if there is an insider information or what but pushing common man’s money into such highly overpriced stock is something i don’t understand.
Everyone is talking about the NIFTY50 gains now and then but for me the real wealth generators are Smallcaps. Just have a look at how the recovery from all time lows have been and if you are bullish on the India growth story, start reading about companies which are going to become a mid-cap or large-cap.
Topic of the week: Embedded Value (EV)
When companies like LIC, HDFC Life, or SBI Life release their financial reports, you may have heard of something called “Embedded Value”. But what does it really mean? And why is it important for investors?
In this article, I will break down the concept of Embedded Value (EV) in very simple terms, explain how it is calculated, and show why it matters, especially for life insurance companies in India.
What Is Embedded Value?
Embedded Value (EV) is a special method used to measure the true worth of a life insurance company. It combines two things:
The value of the current business (the profits the company expects to make from the existing insurance policies).
The company’s net worth (what the company owns today – assets minus liabilities).
So, simply put:
Embedded Value = Present Value of Future Profits (VIF) + Net Worth
Let’s break these two parts down.
1. Net Worth
This is the book value of the company — the difference between what the company owns and what it owes.
Example:
If an insurance company has ₹20,000 crore in total assets and ₹16,000 crore in liabilities, then:
Net Worth = ₹20,000 crore – ₹16,000 crore = ₹4,000 crore
2. Value of In-Force Business (VIF)
This is the present value of all future profits the company expects to earn from the existing policies (policies already sold).
Imagine LIC sells a 20-year policy today. The premium will be paid over the next 20 years, and LIC will make some profit each year. VIF is the total expected profit discounted to today’s value.
Why discounted? Because ₹100 received after 10 years is worth less than ₹100 today. That’s the concept of present value.
So, if the company expects to earn ₹1,000 crore in total future profits from existing policies, and its present value is ₹700 crore, then:
📌 VIF = ₹700 crore
So What Does Embedded Value Tell Us?
EV shows the actual economic value of a life insurance company — not just what it owns now, but also how much money it will make from the business it already has.
For investors, it gives a clearer picture than just looking at profits or revenue.
Example: LIC's Embedded Value
Let’s look at LIC's numbers to understand this better.
As of March 31, 2023, LIC’s Embedded Value was ₹5.82 lakh crore.
LIC’s market capitalization was around ₹4.5 lakh crore.
This means the company was trading below its embedded value, which some investors believed made it undervalued.
How Is Embedded Value Calculated?
Here is the simplified formula:
📌 EV = Net Worth + VIF
But the VIF part can be tricky. It includes:
Future premiums from policies already sold
Expected expenses and claims
Investment income from premiums
Assumptions like mortality (death rate), lapse (policy cancellations), interest rates, etc.
An Example in Numbers
Let’s say:
Net Worth = ₹10,000 crore
Future profit from policies = ₹5,000 crore (present value)
Then, Embedded Value = ₹10,000 + ₹5,000 = ₹15,000 crore
If the market is valuing the company at ₹30,000 crore, then the Market Cap / EV = 2x
What Is Market Cap to Embedded Value (MC/EV Ratio)?
Investors use the MC/EV ratio to decide whether a life insurance stock is overvalued or undervalued.
MC/EV = Market Capitalization ÷ Embedded Value
If MC/EV is 1x, it means the stock price equals its embedded value.
If MC/EV is below 1, it might be undervalued.
If MC/EV is above 2, it may be expensive.
This shows that LIC had a very low MC/EV, while private players had a higher premium. Why? Because investors trust private insurers to grow faster and be more efficient.
Why Is Embedded Value Important?
Better Than Book Value
Book value ignores future profits. EV includes both the current and future.Helps in Valuation
Investors and analysts use MC/EV to compare companies.Reflects Business Quality
A higher VIF means the company is selling better policies, managing costs, and earning steady income.Used in IPOs
When LIC came out with its IPO in 2022, its valuation was based on Embedded Value, not just earnings.
Keep in Mind…
EV only includes existing policies. It doesn’t count new policies that will be sold in the future.
Some companies also report Appraisal Value, which is EV + value of future new business.
EV depends on many assumptions (interest rates, mortality, etc.), which can change.
How Retail Investors Can Use EV
If you’re comparing life insurance stocks like LIC, HDFC Life, and SBI Life:
Look at their Embedded Value
Compare it with their Market Cap
Check the MC/EV ratio
See the trend — is EV growing year after year?
If EV is growing and MC/EV is low, the stock might offer long-term value.
Conclusion
Embedded Value is a powerful tool to understand the true worth of a life insurance company. While normal companies are valued based on profits, life insurance companies are better valued using EV, because of the long-term nature of their business.
If you're planning to invest in insurance companies, don’t just look at the share price or PE ratio — look at the Embedded Value and the MC/EV ratio.
It may sound technical at first, but once you understand the basics, it becomes a useful guide in making smart investment decisions — especially in India, where insurance is a growing sector.
Watchlist
I have been a big fan of Mr. Motilal Oswal and Mr. Ramdeo Agarwal and their investment philosophy. I recently came across one of their partner in crime Mr. Rakesh Mehta and If you would like to understand how he made it big, i would recommend this podcast.
Thank you for all your attention till this point.
Feel free to share this newsletter with someone who is into stocks :)