Govt’s disinvestment lifeline LIC sees opportunity in market rout

Insurance behemoth Life Insurance Corporation (LIC) has stepped up the purchase of equities at a time when foreign institutional investors have been hitting the sell button.

Written by Vishwanath Nair | Mumbai | Published: June 22, 2013 1:01:00 am

Insurance behemoth Life Insurance Corporation (LIC) has stepped up the purchase of equities at a time when foreign institutional investors have been hitting the sell button. The state-owned insurer has bought equities worth R2,500-3,000 crore over the last seven days,sources close to the development told FE.

LIC’s buying accounts for more than half the R5,034 crore in equities bought by domestic institutional investors over the same period,according to Securities and Exchange Board of India data.

“LIC’s investment policy has been to buy when low,sell when high. This was certainly a good opportunity to buy good quality and quantity of stocks at a discount,” said a senior official at LIC,adding that in the wake of the recent market crash,blue-chip stocks were available at attractive valuations. Officials declined to offer insights into specific stocks that LIC may have bought into.

Interestingly,LIC’s pace of equity purchases in the last seven days is equivalent to what the life insurer typically buys over a month. In an interview to FE earlier this year,then-chairman DK Mehrotra had explained that LIC will target to invest R2.25-3 lakh crore by March 2014.

“Of that,about 10%,or about R25,000-30,000 crore,should go to equity,” Mehrotra had said. This would mean the insurer’s monthly equity investment budget would generally not exceed R2,500 crore.

In the past,the government has relied on the insurer to buy stocks when the markets were weak. LIC has also been a significant participant in recent public sector divestment issues such as MMTC where LIC reportedly picked up 25-30% of the issue by committing R200-250 crore.

However,very few of those investments are deemed profitable. As per stock exchange disclosures,Capitaline data and estimates from market sources,LIC is estimated to be sitting on a mark-to-market (MTM) loss of around R215 crore,having invested nearly R4,820 crore in the divestment offerings of FY13 that saw the government raise R23,778 crore.

All seven companies — Hindustan Copper,NMDC,Oil India,NTPC,Rashtriya Chemicals and Fertilizers,Nalco,and SAIL — in which LIC acquired a stake are trading below their respective floor prices.

Over the last one week,the capital markets have seen a steep sell-off due to heavy selling by foreign institutional investors after the US Federal Reserve announced a planned tapering off of its quantitative easing programme. For the week,the Sensex closed 2.1% lower while the Nifty ended 2.4% lower.

However,individual stocks have seen a far steeper sell-off,potentially presenting a good opportunity for long-term investors to buy.

Nifty stocks that have seen significant price falls this week include Bank of Baroda (13.3%),Punjab National Bank (10%),Hindalco (9.3%),NTPC (6%) and ICICI Bank (5%).

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