You are currently viewing LIC: Do not write off LIC stock, it is a solid player: Dipan Mehta

LIC: Do not write off LIC stock, it is a solid player: Dipan Mehta


I got ITC wrong. I was negative on the stock right from last several years or so. And of course, we and our clients missed out on this superb rally. The logic was very simple that tobacco consumption was in low single digit volume growth ratessays Dipan Mehta, Director, Elixir Equities.

When you think that in the short term defence PSUs can give a bout of outperformance. Now when you are talking short term which means you have thought through something. What is that you know we do not know and please share?
I do not know anything which is beyond the public domain. My sense is that this earning season you will see the entire capital goods manufacturing space really flower and they should come out with exceptional results. It is easily a strong quarter and operating leverages also will come into play. The order booking also will be at all time highs and the execution also typically because of March year end these companies tend to speed up execution and generate more and more billing. So I would say that in the entire 30-40 years I have been tracking the market this would be the exceptionally great period for capital goods and PSU defence stocks.

So keeping that in mind I am very positive on that entire space right from L&T, ITD, NCC, you name it I think even ABB, Siemens, Thermax all of these companies which should report great results. There is always a bit of discussion on the price to earnings multiple and sustainability but there is one trend across the board which I am observing which is that a lot of these orders which have come in the last one or two years which are being under execution for the entire industry and L&T in particular have come at decent margin profiles as well.

So I expect the entire industry’s ROEs also to improve and that may perhaps give space for a better discounting and what we like the best of course is the earnings visibility and in a low to flat commodity scenario these companies should be able to manage their operating profit margins very well as well. So that is one space where we have got our eyes completely focused on.

On a traditional PE yardstick, ITC still looks cheap. It is nowhere close to the kind of P multiple let us say Asian Paints, Nestle or HUL is commanding. Is that the right way of looking at ITC because it still has a long, long way to go despite a 50% up move?
I got ITC wrong. I was negative on the stock right from last several years or so. And of course, we and our clients missed out on this superb rally. The logic was very simple that tobacco consumption was in low single digit volume growth rates. Their FMCG business also, although it had generated a lot of volume but if you compare their FMCG business in terms of operating profit margins, return on capital employed, any of such other financial metrics, it was poorly compared to some of the larger home grown FMCG companies as well.

And apart from that, they have the hotel business where there is a high degree of volatility. And clearly, according to us, the opportunity was if they were to split the three businesses separately but I do not think that is on the cards at this point of time. And despite all the last 30-40 year effort of the management to diversify away from tobacco, that has just not happened. I mean, tobacco still is like 90% plus in terms of profits for the company.

So looking at the full picture, we did not think that the stock would generate sustainable long term returns. But I think, it was a value play. And as you said, I think, when there is an opportunity, that certainly outweighs any environmental health concerns that investors may have. And it was a great dividend yield also at that point of time. And we have seen this rally. But the question in my mind is, is this like a kind of a onetime adjustment because going forward, I think next two, three years again, if the profits start to flatten out, then again, you may have underperformance in the stock. So that is my assessment. But as I said, I have got it wrong in ITC so far. So please take my opinion with a pinch of salt.

So I look at it logically, for all the concerns which keep on erupting about the taxation structure for long term and short term will change. If I put two and two together, next budget is going to be vote on account, which will not see tax changes. Then there is a general election cycle, then there is a budget after that. So looks like all the naysayers who have been talking about the tax structure which could change in short term and long term they need to just take it easy now.
Yes, absolutely. I think you need to keep to rest this argument that this new flow which keeps coming. One of the best things that the finance minister has done is given us stability in tax structure. I mean, whether it is corporate tax or personal income tax or even capital gains, the rates have come down but there have been no major changes. And that really is very important in terms of planning people’s business operations or savings for that matter. And now that everybody is going to the new income tax regime, you are going to see more and more money flow into perhaps equities and mutual funds and there is no real reason to invest in PPF and provident fund and some of the other government saving schemes. So keeping that in mind, I think why would you disturb the capital gains structure, you are getting solid revenues from STT as well and that those rates also have been increased. So I think we are pretty much stable when it comes to the tax structure. And every passing budget, the focus will be more on expenditure planning rather than tinkering with the taxes and that I think has been the highlight of the Modi government. And we really, I mean appreciate that kind of an approach. So I think this should be out of the discussion boards for a long-long time.

We got your take on that basket as a whole but also curious as to where you stand when it comes to the likes of Policy Bazaar, Zomato some of these other new-age tech companies. Just today you have the IRDAI guidelines on expensive management with some clarity needed a PB FinTech talking about that, any views on the same or these companies in specific?
I think these companies are generally going as per plan and their focus is now to turn profitable much faster than they earlier anticipated. It is the demand of the investors that these companies start to generate profits and then we can start valuing them based on traditional valuation parameters like price to earnings, price to book and I think they are clearly on that path. They have adequate cash on their books which is perhaps a comfort for many investors and these are genuinely new age businesses. A few of these will be really large companies in the 2030s decade. And if you have invested early in them, they could turn out to be fabulous multi-baggers as well. They are going about changing habits, changing consumption patterns and they are themselves large players or dominant players within the industry. And gradually they are creating a stronger and stronger mood for themselves. So our strategy is to buy them somewhat like options have a little bit of exposure 5-10% of your portfolio in such new age businesses. And let us not try and assess them or look at them every quarter but give them a longer runway and remain invested and see how they are actually progressing. So they are generally positive but as I said I think you need to have a really long-term temperament for these companies and not get impacted by a lot of volatility which is there in their stock prices and maybe their earnings as well.

Whatever is said and done when LIC was not getting listed, everybody said okay, government is going slow on reform. They are not able to list LIC. When LIC got listed, it was very nicely priced. Everyone said that look this is an issue which is leaving a lot on table, but it is nowhere close to its listing price.
Yes that really is an enigma and it is partly to do with the fact that LIC does not disclose its adjusted value in a timely basis and that makes it very difficult to analyse.

Point number two, I think it is very sensitive to stock price movements much more than any other insurance companies. And since listing, I think we have seen the overall market trends to be on a declining mode as well and that also has impacted the sentiment in LIC. And although I think insurance companies also have underperformed for various reasons call it high base effect, call it competition, regulatory reasons so on and so forth. So all of this has resulted in LIC underperforming but do not write off this stock, I think it is a solid player. And at some point of time, once they start getting some of the more profitable products going and scaling up, you may see exceptional numbers coming through from LIC as well. Despite so many new players, they have been able to hold ground, maintain their market share. And as such, it is quite a well-run, well-managed company as well. And who knows, I mean we had written off PSU banks and PSU capital goods manufacturing companies and defence companies two- three years ago and see what kind of returns they have given. So why not give LIC a chance as well.


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