LIC No 'Spring Chicken', Shankar Sharma Says After Flop Listing
"Most of the juice has been sucked out already at the point of their (LIC) listing," veteran investor Shankar Sharma says.
A mature global bull market like now will face headwinds from higher rates and geopolitical issues and the single biggest determinant for valuations will be the cost of capital, according to veteran investor Shankar Sharma.
Since the cost of capital is slated to inch higher, the PE multiples will get compressed, Sharma told BQ Prime's Niraj Shah in an interview. While he admitted to losing money in the current market, he said his losses are "restricted" when compared with that of an average investor.
Sharma cautioned that the U.S. is in for a hard landing with the unwinding of easy-money policy being a painful long journey. But he will use that as an opportunity to buy stocks that can last in the portfolio for the next three to five years at "palatable" valuations.
Stock Valuations
Sharma expects valuations in India to come down. Contract manufacturers trading at 100 times their earnings in India compared with 10-12 times in other markets like Taiwan is baffling, he said. That can't last long and investors will realise that paying a premium multiple for standard growth is "not a good idea".
"A grocery chain in India where a [Rs] 1,400-1,500 crore profit trades at [Rs] 2.5 lakh crore market cap is absolutely insane and ridiculous," he said. "No metric can justify that. You will see multiples collapse".
LIC No 'Spring Chicken'
Life Insurance Corporation of India listed on the bourses at a discount to the IPO price, after the government scaled down the size and valuation of its initial public offering.
“LIC is no spring chicken,” Sharma said, underscoring it will be tough to make outsized returns on most insurance companies of that size and scale. “Most of the value is captured at the pre-IPO stage itself… Most of the juice has been sucked out already at the point of their listing.”
Shankar said he finds it “absurd” when fund managers say that “insurance is a great industry, India is underpenetrated, and therefore, buying an insurance stock will be great”. Some even compare insurance stocks today to the banking stocks in the 1990s, though those companies were at a nascent stage, he said.
The data for India is not comforting from an “underpenetration perspective”, and the amount of insurance premium generated relative to GDP is “a fairly significant number already, and actually higher than most emerging markets”, he said.
Adani-Holcim Deal 'Good' For Steel Sector
The Adani family acquired Ambuja Cements Ltd. and ACC Ltd. from the Holcim Group.
Sharma said that a lot of mergers and acquisitions have happened in the cement and steel space. “Both the industries have consolidated over the last decade or so, with weaker players exiting.”
According to him, the Adani-Holcim deal will be good for the industry and existing players, and he does not expect a price war.
Watch the full conversation here: