Hemang Kapasi is the Head of Equities at Sanctum Wealth
Hemang Kapasi, Head of Equities at Sanctum Wealth said the market is seeing heavy volatility with the risk that the US Fed may raise interest rates by 0.25-0.5 percent in March meet itself.
Kapasi, who has over 11 years of experience in the Indian market as an equity research analyst and fund manager, said the market has already priced in 3 hikes in FY22.
On the LIC IPO, Hemang Kapasi said the market-capitalization of India’s largest life insurance company could be around Rs 15-17 lakh crore. LIC could garner high multiples as its ROE (return on equity) is the highest amongst its peers, he added.
Edited excerpts:
Can the oil prices remain elevated due to ongoing Ukraine-Russia stand-off?
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Geopolitical tensions continue to remain elevated adding to investor uncertainty and rise in oil prices. Till a solution to this crisis isn’t found or a war-like situation isn’t averted, pressure on oil prices will continue. Nevertheless, we believe that supply challenges also will continue to keep oil prices elevated and wont retreat to $ 60-70 a barrel easily.
Do you expect the US Fed to announce a 50 basis points hike in interest rate in March meeting to fight inflation?
US Fed in its meet earlier indicated that interest rate hikes are imminent in near future to reign in the high inflationary pressures. Markets are already pricing in 3 hikes in FY2022. Markets are bracing for heavy volatility with the risk that Fed may raise interest rates by 0.25-0.5 percent in March meet itself.
Will the hike in US Fed rate and rising US bond yields impact FII flow in India throughout the year 2022?
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There’s no reason to ascribe for negative view on India by FII’s as India has been one of the best performing markets in 2021. Relative outperformance led to profit booking, dollar strengthening leading to some weakness in other asset classes as central banks focus on reigning inflation, reduction in liquidity and geopolitical tension being some of the key reasons which can be ascribed for their selling.
All the reasons ascribed are more technical rather than fundamental, which can reverse quickly once the perceived growth outlook for India is intact. Having said that India will be one of the fastest growing economies in the world in 2022 led by focus policy to scale up manufacturing and exports, resurgence of capex in infrastructure and rising formalization and digitalization aiding to better profitability of the organized sector. It’s a matter of time and not when FIIs will turn net buyers.
What could be valuations and tentative issue price for LIC, which is expected to hit Dalal Street in March 2022?
LIC a behemoth in the insurance space has recently filed preliminary papers with SEBI. This we believe should lead to sucking of liquidity from the secondary markets as investors gear up to participate in the IPO. LIC reported a CAGR growth of 8 percent over FY11-21 and having return on equity (ROEs) of more than 80 percent in FY21.
Also read – LIC likely to float $ 8-billion public issue on March 11
Insurance companies are usually valued on Embedded Value (EV). EV is nothing but the sum of the adjusted net worth and the discounted value of profits from in-force policies. For life insurance companies, the EV helps to determine if the company is richly or cheaply valued, this is just like how banks are valued in terms of price to book.
LIC’s embedded value as on September 30, 2021 has been estimated at Rs 5.4 lakh crore. Similar listed insurance companies trade at a multiple of 2.5-4x embedded value and taking an average of above multiples number and applying to LIC EV, the market capitalization of India’s largest life insurance company could be between Rs 15-17 lakh crore. LIC could garner high multiples as its ROEs was the highest amongst its peers.
Do you think there would be major participation from all kind of investors including its employees and policyholders in LIC IPO?
LIC is India’s largest insurance company having a large market share of more than 60 percent. It is one of the most anticipated IPOs and should see a frenzy in its applications across all categories of investors.
What is corporate earnings season (Q3FY22) indicating and have you changed your full year EPS estimates?
As most of the results for the Q3FY22 have been in line with our expectations. Although topline has increased, it was led more by pricing action and there has been a clear pressure on margins front as input costs continue to remain elevated and on the rise.
Nifty50 companies have delivered a 25 percent growth in the topline and a jump of 23 percent in PAT despite EBITDA (earnings before interest, tax, depreciation and amortisation) increasing just by 14 percent. With most corporates facing input cost inflation and normalization in other costs, calibrated price hikes are been taken keeping channel inventory and demand scenario in consideration. We expect sectors such as Financials, IT, Automobiles and Infrastructure should do well.
In the current market volatility and correction, have you found exciting themes to pick and why?
In our investment outlook we have identified three broad themes which should continue to play out in the coming years – Housing, manufacturing and exports. Withing these broad themes we continue to be positive in segments such as Housing financiers, building materials and also sectors to benefit from domestic and export opportunities like speciality chemicals and Auto ancillaries.
We also expect the capex related theme in infrastructure and banking to play out in near future. With recent correction in Indian markets, we believe this gives investors an opportunity to invest in these themes from long term perspective.
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