What people should look at is that insurance companies keep on doing well and the premiums they collect are greater than what they need to pay out for the next 10-15 years. To that extent, they will keep on adding value to these companies, says Sandip Sabharwal, asksandipsabharwal.com. Excerpts from an interview with ETNOW. In 2017, every one got blinded to the risk and now everyone is blinded to the opportunity in midcaps. In 2017, midcaps were trading at a premium to largecaps. Right now, they are trading at a discount and everybody is not buying it because they are blind to the opportunity?That is the psychology of investors and the stocks are falling as people do not want to buy because it has risen 15%-20% from the bottom despite the fact that it might be down 80% from the top and the valuation might be very cheap. In midcaps, typically the maximum buying comes in at the last 20% move of the stocks. That is when most of the investors get in. The first buying comes when we are nearing the last 20% of the decline. Where has the first buying in midcap has kicked in?Yes, the worst of the midcap decline is over. It may be over in many of the smallcap names also. In Tata Power, the valuation is actually available at half the book value. is Tata Power a value buy now?Power generators in India typically have never created wealth because there is always an element of political interference in the pricing. Despite regulators, which are supposed to be independent, coming in, we have seen in Andhra Pradesh, all PPAs were cancelled and they have tried to renegotiate them without going into the terms and conditions of the contract etc. Besides whatever happened on the coal front on Tata Power, Mundra plant etc, I would be somewhat sceptical on how they would do. Despite the recent reforms which were announced whereby the distribution companies are supposed to provide bank guarantees when they buy from the generating companies, it is a very positive move. If that gets implemented in both letter and spirit, then we could see an opportunity coming up and so we will wait it out. Over the next two, three months, we will see how effective it is and then the risk profile of generating companies will improve significantly. There was good news on the economic front coming in on from our macro data. Both CPI inflation as well as the IIP numbers have come in a lot better than expected.CPI inflation was below expectation. Yes, there were some apprehensions that we could see a pickup in CPI inflation because of the way food prices behaved due to rain disruptions. That clearly did not happen. Going forward, post monsoon we will again see moderation in food prices. So, inflation is well under control. We need to see how RBI responds to this because they believe 50 bps is too high a cut. Let us see how much they cut by next time. But it is a given that they will cut in the October policy?Yes, obviously they will cut, but by how much is the question. As for IIP, the only standout point was that capital expenditure cycles still seems to be muted. So, capital goods output still saw a contraction but on the non-durable side, there was a 8% plus upswing which is surprising, given the commentary coming out of most of the non-durable companies that growth is slow. Therefore, 8% is a huge growth in the current economic context. We could see some of the FMCG companies respond to that because they largely sell these non-durables and that is typically the first step in a revival cycle. First the non-durables should revive, then the durables then comes the capex cycle.What about Yes Bank, it has made it to the HDFC mutual funds portfolio as well. But for a retail investor. is it worth the risk?The QIP happened at Rs 87-88. After that, the stock fell to Rs 60. A lot of people must have invested in the QIP and they will be stuck. So, it is a very tough call because it has got a Rs 2,30,000-crore advance book. We really are not sure of the quality of that book. Every time any issue comes up — be it a default by Eveready or Cox & Kings — Yes Bank seems to be involved. That is a big problem because every time the stock tries to improve, some news comes in and Yes Bank is dragged right back in, It is a very tough for retail investors. Even professional investors are finding it difficult to analyse this bank. So how can a retail investor analyse? People are just going by the price. People think Rs 67 is cheap because they have seen Rs 400. But I am not sure if it is cheap. Maybe the stock could be Rs 100 in a year’s time, or it could even be Rs 40-50. I do not know. In the pharma pack, DRL has got an EIR from USFDA. Do you find any stocks attractive in this pack?I am not sure what this EIR (Establishment Inspection Report) means, whether Dr Reddy’s gets a clean chit or there are some observations or not. If there are no observations, then obviously it is a positive. Dr Reddy’s is something which we hold. I believe valuations are reasonable and their product profile and growth profile seems to be good from here on for the next two, three years. I believe Lupin also is in a phase of bottoming although near term figures are not there. But people need to take a couple of years perspective in these stocks. RBI’s push is coming in for retail loans. The fact that banks now will be able to lend more to customers for buying consumer products, should give a leg up and aid consumer goods sales ahead of the festive season and also for personal loans. How much can it translate into more buying of consumer goods ahead of the festive season?It is a positive. I do not think it will have such a great impact because it was announced long time back. That is another problem in India where announcements are made too early and implementation comes later. It is this gap between announcement and implementation which holds the economy back, By reducing the risk weightage, you are essentially freeing up liquidity and for SBI, BoB or other banks, there is surplus liquidity. This is not a liquidity-starved market where you just loosen up the nuts and bolts and money comes in.It is not a liquidity thing. Here with the same capital adequacy, you can lend more if the risk weightage comes down. So if the risk weightage has increased, then you need more equity capital. But do you want to lend more? The ability to borrow is always there in an economy like India because of the way the economy is structured. It is the willingness to lend which is a huge problem. Somehow I just get a sense that everyone has become too risk conscious?Yes, that happens after the IL&FS, DHFL fiascos. People lending to these institutions have taken a hit. Now they are conscious but luckily in India, on the consumer side, the default rates are historically very low relative to most of the developed markets. Also, in the US, the defaults are much greater than in India. Many of the banks will use this upcoming festival season to try and push retail loans more because typically defaults tend to be very low. Recently one has seen at least life insurance stocks get a rerating within this entire basket. What would you like and would you even recommend it for a long haul?Insurance companies have been very underowned because there were very few stocks. It is a stable annuity business and many companies have been buying despite such huge offer of sales from HDFC Standard Life. The stock has actually held on and moved higher and that just shows demand supply scenario in insurance companies. This sector should continue to do well. We hold HDFC Life because I like their business profile and to that extent, it will still do well but then from here on, the returns should be moderate because they have outperformed so much that people should not expect the same kind of returns they have given over the last one year, will sustain. What about autos? Every time we see a recovery there, there is a flip-flop again on some news?We have started to see a recovery in consumer autos. That should start getting reflected in monthly numbers and to that extent many of the two-wheeler stocks and Maruti would still do well from even the current levels. There is still stress on the commercial vehicles side and to that extent, the pure play commercial vehicle play is Ashok Leyland. We have bought it but there are no near-term triggers besides the fact that it trades at cheap valuations. So, it just needs one or two months of good data for the stock to move up sharply. That is how I would pace it. Given the news flow coming out of the GST Council, I would put a low percentage on a GST rate cut. I would think that because some state finance ministers are openly coming out and saying no, unless and until the centre really wants to push it, it will not happen. Let us wait for the next press conference of the Finance Minister, I think that will give us a better perspective. If a GST cut comes, they will compensate from somewhere else because they have the GST revenue target which as to be met by hook or by crook. They are already shortening on it and one has to make up for the deficit. Would a cut for autos mean a hike for some other segment?Actually it is not required, if they cut 10% for three, four months, let us say they say we will just cut till 31st December, whatever you want to buy, buy it till then. They will lose some revenues, may be around Rs 10,000 crore over these three months. But if the sales go up by 15-20%, that is more than compensated. It is typical economics. It is how the marginal cost of taxation works that if you cut and the revenues move up, then you actually end up gaining. The pharma and the IT index have not really kept in pace with the depreciating rupee. Typically,when rupee depreciates, you go to IT pharma. World is in a problem, you go to IT, pharma. India is in a problem, you go to IT pharma. Why has it not happened this time?It has not happened but some stocks have held on. Infosys continues to be near 52-week highs and instead of pharma and IT, this space has been taken by some consumption stocks and these insurance companies which we were discussing. They have become more defensive play and so people have been gravitating towards them. As far as insurance companies are concerned, people believe there is no NPA issue and long-term growth prospects are good. So, these sectors are defensives now. How does one value an insurance company? How does one know that this life insurance company is better than the other life insurance company because at the end of the day you are in the same product with a different service and a different brand?Valuing life insurance company is somewhat complicated. But I would say that given the profile of India and the age profile, what people should look at is that these companies keep on doing well and the premiums they collect are much greater than what they need to pay out at least for the next 10-15 years. To that extent, they will keep on adding value to these companies. This is a simplistic way of putting it. I do not see a big risk to them over the next 10 years at least.
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