LIC, the big daddy of the Indian equity market, is on a shopping...
Not Everybody Is Selling
While it's demoralising for investors to hear about the exodus of deep-pocketed FIIs, they can take heart from the fact that LIC, the big daddy of the Indian equity market, is on a shopping spree. Krishna Kant tells you why
THE WAY the Indian equity market has moved during the year so far, it seems a big sale is going on at the bourses. The biggest party poopers have been foreign institutional investors (FIIs).
They have reportedly sold nearly Rs 50,000 crore worth of equity in the first seven months of the current calendar year, or an estimated 6% of their cumulative portfolio at the end of '07. This has created an impression that all large long-term investors have lost faith in Indian equities.
Nothing can be further from the truth. While it's demoralising for retail investors to hear about the exodus of deep-pocketed FIIs, they can take heart from the fact that the big daddy of the Indian equity market — Life Insurance Corporation (LIC) — is on a shopping spree.
Taking advantage of the fall in stock prices of India's top companies, the insurance behemoth is meticulously preparing for the next bull run by accumulating additional stakes worth Rs 11,000 crore in India's top 21 companies across sectors.
LIC now owns an average of 6% of the equity capital of these companies, compared to around 5% by the end of the June '07 quarter.
In many top-rung companies including Tata Motors, Siemens, Grasim Industries, Cipla and Kesoram Industries, LIC's holding has now crossed or is approaching the technically important mark of 10%.
Combined with its already large stake in companies such as Larsen & Toubro (L&T), ACC and ITC, the life insurance major is truly emerging as a force to reckon with on Dalal Street.
Interestingly, a bulk of the incremental investment came during the bear phase. Nearly three-fourths (73%) of LIC's total incremental investment was done in the past two quarters of the current calendar year. And in quite a few companies, LIC's net buy ratio in the first two quarters was in excess of 100%.
This means that LIC was booking profits when the market was at its peak during the December '08 quarter and used the profits to raise its stake in these companies when their stock prices subsequently fell in '08.
And that's where the lesson lies for retail investors: Make long-term bets, but don't lock in your entire investment in any stock, and don't exit completely unless you have lost faith in the company or its management.
Divide your investment in two parts — core and floating. Keep your core portfolio untouched across the ups and down, but churn the floating part to take advantage of market movements. Say you own 500 shares in ACC, then you can define 250 shares as core and keep churning the other half (the floating part) to take advantage of a rally. The profits so booked will raise your purchasing power when ACC is in a bear phase, as it is right now.
This is exactly what LIC has been doing over the past year. It used last year's rally to book partial profits in some of its oldest equity investments. For instance, it was continuously shedding its stake in L&T and Tata Steel during June-December '07, when their stock price was rising.
As the tide reversed in January this year, LIC become a net buyer on both these counters. In the past two quarters, it picked up an additional stake worth Rs 1,500 crore in these two companies, overwhelmingly financed by nearly Rs 1,100 crore raised by selling them at their highs.
In all, LIC raised nearly Rs 4,000 crore by diluting its stake in the 21 companies during the latter half of the last calendar year. This cash came in handy when the market turned bearish in the new year. The bull run profits financed nearly 40% of LIC's bottom-fishing during the January-June '08 meltdown. And in quite a few counters such as Tata Steel, LIC is cash positive even after hiking its stake, thanks to its right timing.
LIC's moves during the past 12 months also demonstrate that it pays to go against the market mood if the company has a compelling growth story in the long term. The insurance major has been accumulating Tata Motors, Kesoram Industries, Indian Hotels and Bharat Heavy Electricals (Bhel), among others, for more than a year now, even as these stocks continue to underperform the market.
While bottom-fishing in these counters is yet to pay off, LIC has made a small fortune on its incremental investment in ITC and Cipla during '07. Till last year, both these counters had underperformed the market, but have since then become two of the top performing large-cap stocks.
Who knows what lies ahead for the current underperformers in LIC's portfolio. However resourceful you may as an investor, predicting the future course of the market with full certainty is impossible.
But it is very much within your means to minimise the downside in a meltdown and increase your chances and quantum of gains when good times arrive. And this is exactly what the bigdaddy of D-Street is doing.
LIC has ensured that when the tide in the currently unpopular sectors such as auto, capital goods, cement and hospitality reverses, it will be sitting on fat profits, which will more than make up for the losses it has endured so far. Nothing stops you from following in LIC's footsteps. So, go ahead and be brave...
krishna.kant@timesgroup.com