Slowing global economy has hit insurance biz growth: Equinomics

Chokkalingam further listed his stock picks and sector outlook.Below is the verbatim transcript of G Chokkalingam’s interview to Prashant Nair & Ekta Batra.

Prashant: ICICI Prudential, what did you make of it?

A: We advised our clients not to apply because we have found that it is quite stretched in terms of valuations. So, even after weak opening, I would still suggest hold and wait for anywhere below Rs 300. If you see, in the last four years, its net profit has grown at around 5 percent per annum and the premium also has grown in single digit at around 8 percent. Going forward, the competition is going to be very tough because we have seen the consolidation, we have seen the infusion of foreign direct investment (FDI) into the insurance sector and third, the whole economy has slowed down so therefore the insurance business also has slowed down. Therefore, I would be comfortable to look at the stock anywhere around Rs 280-285 levels.

Ekta: We have one trigger which is coming up for the markets which is the Reserve Bank of India (RBI) policy this Tuesday, new Governor. What is your sense in terms of whether they would act on rates at all this policy and what might be the quantum of rates that we could see possibly in this quarter, the October to December quarter?

A: For last two years I have been consistently saying that the worry on inflation is overdone because the entire world is now worried about the deflationary fear. I don’t want to repeat, everybody knows the kind of negative interest, zero inflation and growth slowdown. So, you can’t be in isolation. So, therefore I firmly believe that the new monetary authority would be pro-growth and they would cut down the rate aggressively, at least by 50 basis points and overall the outlook of monetary policy would be pro-growth rather than worrying about inflation.

Prashant: Let us talk about a couple of stocks. Let us start with KCP Sugar Ind Corp which you like. Can you talk about the name?

A: We successfully made money and it went to Rs 46 recently. Now again it has corrected back to around Rs 33-34 level. This is one of the most efficient sugar companies in the country in terms of quality of management, efficiency of sugar recovery and balance sheet. Out of the last 14 years, 13 years it has paid dividend consistently. This is very rare in the sugar industry because it is highly cyclical.

Second, least leveraged, the borrowed fund is only around 20-22 percent of the total capital employed. Third, it has got a lot of long-term triggers. It has got a lot of land bank in Chennai; it has got a lot of residential properties in Andhra Pradesh. The company has acknowledged in the annual report about these properties in Andhra. So, I firmly believe that as and when they unlock the value this can become even a multi-bagger otherwise conservatively it should give somewhere around Rs 46 return; target price I meant.

Also, very interesting point is that despite a good monsoon the sugarcane sowing has come down by almost around 7-8 percent now, which means that the sugar output which will come into 2017 also will be down significantly. So, that would be positive for efficient sugar companies like KCP Sugar.

Ekta: What is the story on Tata Sponge?

A: I like the stock very much. It is cash rich company, the cash is around 60 percent of the market capitalisation. In fact last six months all the metal companies have gone up across the world and this company has seen rise in the prices also. Last three months sponge iron prices have gone up by about 21 percent and secondly it has got a good captive power which is available at a very attractive cost. Therefore, I firmly believe that going forward the earnings would improve substantially.

Prashant: Hasn’t the stock done phenomenally well?

A: It depends on the time duration.

Prashant: From this year for example.

A: From the bottom but then what has happened last year it got hammered from more than Rs 1,000 to Rs 600 level. So, if you take a two year high, it is still down by 40-50 percent and as I mentioned the cash itself is around 60 percent of the market capitalisation. Also, very interestingly what has happened in the sponge iron industry is that in the last two to three years many small sponge iron manufacturers shut down the business. They were not able to compete. So, only the large players like Tata Sponge they are there and they are consolidating. So, that is another big positive trigger for the stock.

Prashant: You also like MOIL, manganese ore; again cash is a big component of why you like it?

A: Not only that, it is very interesting. I also personally hold the stock. It came out of the IPO around six years back, around Rs 400. Ever since people have bid in IPO and bought post IPO, they are losing money of course that is not the sole justification to buy the stock. As you mentioned, it has got a cash of nearly 75 percent of the market capitalisation. Now the buyback is there. In my view only the government might bid for the buyback because the market price is above the offer price.

Now even if government tenders all its shares, post buyback still the cash will be 60 percent of the market capitalisation. Now, again, the main trigger for the stock to perform going forward is that the company has recently got two mines, one from Madhya Pradesh and one from state of Maharashtra. Now, if the company is aggressively looking to expand the capacity by 100 percent, so, it will become about 2 million tonne and also in September month the company has raised prices of ore. So, all these act as a good trigger for the stock.