Buy insurance cos on correction, like pharma: Dimensions

On pharma sector, he recommends to hold the stocks for at least 3 years. He is confident that pharma is a multi-year story and investors can still make money over the next two-three years despite the stock prices being overvalued.

Below is verbatim transcript of the interview:

Q: Should we look at the passage of the Insurance Bill as game changing news as the government is finally getting some acts passed or is it actually an indication that we take six years to do even something as insignificant as this?

A: Yes, it took six years and we know the fact that BJP opposed it but the fact that it has gone through and so quickly in a constructive frame of reference is very great positive for the economy for three reasons. One, it is a great pointer to the fact that it is not all going to be confrontation, it is going to be cooperation where it makes sense.

Two, it will give you the kind of capital that you can’t even imagine and we are just at the 49 percent threshold. When the next threshold comes of 51 percent another big floodgate will open and so, it is a great access to capital.

Three, this takes us into a different league in terms of the insurance products and penetration in the country which is the biggest investor in domestic equity markets across the world.

Therefore, it is not only a positive in the longer run for the insurance business, for the companies that are in insurance business but also for the domestic equity market because we have always suffered this inadequacy vis-à-vis foreign institutional investors (FII) flows.

Partly it is getting addressed this year that we are already seeing domestic inflows into the mutual fund outrunning and outgunning the FII flows. But with a longer-term perspective it is a great move and will be phenomenal for both equity market as well as companies that own insurance companies.

We have just seen the tip of the iceberg. The valuations of these companies are going to go sky high over the next five to ten years.

Q: Finally we have seen some legislative backing and the BJP turning the tide in the Rajya Sabha where it has minority. That is something that not too many people were expecting in any case. But in the sector itself we have seen a big run up. A lot of these valuations look very expensive like Max India. So, where is the value? Would you still buy some of the larger banks that have exposure to insurance or would you buy any of these pure play insurance players like Max?

A: If the company that you name is a singular pure play insurance company and if you want an exposure, you buy it. Yes, you are right partly, in the current context of 24 months or 12 months the valuation may look priced pretty steeply at this point of time. But an investor must look with a three to five year timeframe; these are companies that will give you tremendous value.

Secondly, the volatility in the stock price will be much less because these are the annuity earners, these are like FMCG, pharma stocks. You have already seen the re-rating happening in the telecom stock in a similar manner.

These are those kind of stocks that are kind of bellwether, goes on and on at this point of time unless there is a calamity, what has happened in the US on the real estate prime, sub-prime. But assuming our regulatory framework has learned lot of lessons you have to look with a three-five year perspective and say I want an entry in the segment.

Yes, the valuations are steep, you may even see some correction in 12 months but that is the time to buy into these stocks. So, people who don’t have an exposure to this it is a nice place to have an exposure from a three-five year perspective and keep adding on a correction, not selling off on a correction.

Q: Would you prefer the larger players, the banking guys who know the business?

A: You will have to go for the largest five-seven players because there will be a shakeout in the industry. Also, the risks that run with this whole business of life insurance has to be on a well capitalised platform, a smaller company may have a shakeout and may almost disappear over night. Many insurance companies globally have kind of disappeared or even the big names of India, the Standard Life, Avivas at the downscaling they have faced over the years.

You have to look at bigger banks and bigger institutions in India because they can support it locally as well as on institutional basis. So it is not only that you depend on a foreign partner, you got to depend on the local institutional partner as well.

It is a difficult business but once you have entered, the top five are going to rake in the kind of moolah that people can’t even imagine.

Q: You just briefly mentioned telecom stocks and the re-rating over there. Bharti, this week has rallied about 15 percent but it has not been a very smooth ride for the stock in the last six to eight months, maybe because of what is happening with the Africa business. That seems to be a nagging worry at the back of one’s mind. Would you still put fresh money into telecom both Bharti and in Idea?

A: Telecom will gravitate post the spectrum auction. With the raw material costs being frozen it will gravitate towards a semi-FMCG model because you have consumers who are loyal. You need to product day in and day out. You are billing it, there is no lumpiness in the revenue.

The biggest point is that the price competition is out of the way. They have all realised it doesn’t work, the freebies don’t work.

You saw one of the participants that took a heavy knock and is now number four or number five in the game because they came at very cheap rates but the cheap rate season is out.

There will be lot of sense in the market and therefore, on a PE basis or a price-to-book basis there will be an expansion in valuation over the next two to three years having frozen the spectrum issue, the cost and with the annuity income I don’t see a major price war in this business.

Therefore, I see more expansion of PEs and the price-to-book ratios will give it an upside valuation over a period of two to three years and we are pretty bullish that this is a budding FMCG story and not a competitive airline story.

Q: Apart from insurance and telecom is there any reason to buy some other stocks? For instance LIC has apparently written a cheque or will shortly write a cheque of about Rs 1 lakh crore to the railways. A lot of insurance money will also mean these companies will look for longer-term debt instruments. Will all this mean that we should start looking at any of these infrastructure plays, any of these annuity returners, the BOT companies?

A: I heard someone on the channel a couple of days back asking would you buy it and LIC writing a cheque, LIC is doomed to grow the MTNL, BSNL way. Take it from me, five to seven years down the line if this is the pattern of investment it is another BSNL, MTNL in the making. So that is the risk they are running with kind of funding the government. It might as well be government department.

So that is another positive for the private sector because LIC is on the way down with all this kind of railway funding.  The railways can’t pay you back and so, it will be negative for the insurance companies. You have already seen LIC’s share going down year-on-year (YoY) on insurance.

So LIC does more of the railway funding, you should not even try to put your money with LIC. Having said that, on the infrastructure side I still don’t believe it has a story. Let us talk about the next three quarters.

Most infrastructure companies are so debt laden that they can’t even survive a full year out. They are all under CDR mechanism at this point of time. There is by and large no hope of getting equity, the interest rates are not coming down.

You have already seen zero transmission of rate cut in the market, you have already seen bond yield hardening in the market which means that even if Reserve Bank of India (RBI) cuts it in April or June whether it will cut the real interest rate is the question mark.

It has not happened so far, I don’t think it will happen. And we are all forgetting the inflation numbers that came yesterday. So for infrastructure and BOT there is no story this year, at least 2015. Lots of other domestic things happening here, why put your money where there is no story.