What can take the Nifty higher now? Deepak Shenoy answers

“If foreign investors were to start putting money back into India, markets will start to go up. It is simple because it may not be news driven. It has got to be liquidity driven. The fact that markets went nowhere last year is because foreign investors took out Rs 200,000 crore while domestic investors put in Rs 200,000 crore. So, net-net there has been very little addition to stock market liquidity,” says Deepak Shenoy, Founder, Capital Mind

Have you done numbers which would capture the real impact of the Budget announcement for a life insurance company like LIC?
We did two things. Of course, first, the idea was they had to announce the results this time for us to understand that they truly were taking a lot of the non-par profits into their account. They have done that. More than Rs 6,000 crore was transferred this quarter. So the run rate is going to be Rs 24,000 to 25,000 crore as of current and we believe about Rs 35,000 crore in a couple of years as profit will be transferred to shareholders.

Given that the shareholding part of the organisation does not pay any tax, this is pretty much net profit for you. So, the impact of the announcements on the Budget is primarily around the fact that there is no tax advantage to holding policies where you pay more than Rs 5 lakh in premium per year starting April 2023.

I do not think and as much as we have heard from the management itself, not even 2% or 3% of their policyholders would have premiums of that magnitude. They actually work in a much smaller premium zone. They also have the largest field force in rural tier II, tier III where paying a premium of Rs 5 lakh to 5 lakh plus per year even across different insurance companies is largely difficult. They do not have the capitalisation to be able to pay that much and a large amount of the people who are paying these LIC policies are not really doing them for tax benefits, in the sense that even if the new tax regime were to come, for a lot of these people, it is just for saving, it is one way to save.

It is a person who is available to them as an agent who is a distributor or an agent close by who can provide these opportunities. Tax saving in terms of the 80C kind of saving for some of them is not meaningful and even then, they would probably take advantage of the old regime for a long time.

So, I do not think that in the near term, LIC will be impacted that much. The stock price, of course, is down quite a bit. So we are okay. We in fact increased our allocations recently. However, I think this will take two-three years before it resolves itself and the profits start to attract shareholders. Even now they have not announced a dividend but maybe at the end of the year, they will. Longer term the story is much better here.

They are trading at 75% or 80% of embedded value where HDFC Life is trading at 300% of embedded value. So we are going to see a much lower multiple for LIC anyways. But I do not think the difference ought to be this much. So I'm looking forward to more results to come.

Export businesses like Balkrishna Industries have really taken it hard. Be it the commodity correction or for that matter the entire benefit of decline in freight, none of it has worked and the margins have really been badly hit.
They have and we own Balkrishna just as a disclosure. One of the things that happened is also, of course, Europe itself is down, as also a bit of North America. One of the problems over here is this has also been a weak time for some a lot of the other parts of the business as well. They have just commissioned a new plant and so it is not going to be meaningful in the December quarter, but will start making a difference from the March quarter.

There is also some more capex going on in terms of a new plant and the raw material price decreases have not yet been translated fully to them according to the management. They are seeing a very slow decline in raw material prices. Margins have collapsed quite a bit and there is a fear there. The stocks are down, but for the valuation it has, there are relatively high margins and we believe once the markets go back, there is possibility that these margins will start to come back. Of course, the results have just come and so a lot more analysis needs to happen to understand whether this is structural or just a cycle and the company will live through it.

We have owned this company for more than five years. So the decline is not something that is loss-making for us but it does call into question a lot of the export businesses' viability, especially European export businesses.

Whatever could go wrong for the market has gone wrong this year. The Adani fiasco, commodity prices coming back, FII selling, confusion in which way fintech is headed – January was a complete disaster for fintech and consumer tech yet Nifty is still at 17,000. So, if anything incrementally positive comes for the market, is the Nifty going to go higher rather than lower?
That is a very good question. The thing that drives a lot of volatility out of the Nifty is the fact that Nifty futures and options are so heavily traded. We do not see that kind of lack of volatility for the junior Nifty or for any other of the indexes. Some of our valuations are still sky high and some other valuations are relatively low.

If foreign investors were to start putting money back into India, markets will start to go up. It is simple because it may not be news driven. It has got to be liquidity driven. The fact that markets went nowhere last year is because foreign investors took out Rs 200,000 crore while domestic investors put in Rs 200,000 crore. So, net-net there has been very little addition to stock market liquidity.

Given the new rules that have been coming around from SEBI of perhaps increased brokerage because of their lack of float income generation, given the lack of interest in foreign institutions to put in more money into India, over last year they have taken out a lot and in January also, they took out Rs 26,000 crore. The increase of liquidity from one of these sources before good news drives the market. Good liquidity drives the market and we have not had that for a while.