LIC nets Rs 10,000 crore by taking bold contrarian stock calls

In the game of stock picking, the largest local investor, LIC has been a contrarian. It’s a bet that has paid off so far in the current bull run.

LIC’s mantra is simple: buy shares of operationally sound companies that are caught in unfavourable business cycle and trading at a lower multiple. Based on the latest stock holdings, the state-owned insurer has gained almost Rs 10,000 crore in the past four quarters on back of its contrarian calls on scrips like BHEL and Axis Bank.

In both stocks, LIC raised its stake nearly 4% since December 2013 when several brokerages gave ‘sell’ call and even three months ago many were bearish about the stocks. “The biggest ability of LIC is to relate the current valuation and current business cycle of the operationally sound companies. When they find valuation of a stock is discounting current business cycle excessively, LIC buys the stock,” said G Chokkalingam, Founder, Equinomics Research. “What works in favour of LIC is the duration of holding period for a stock. Being an insurance company, it can hold stock for 8-10 years. However, mutual funds do not have such flexibility as they are under pressure to outperform the benchmark index on a quarterly basis,” he said.

The point LIC started buying BHEL, three out of four analysts covering the stock came out with ‘sell’ reports. Their reasons: a depleted order book and an operating profit margin that was 50% lower than the historical average; and, thanks to competition, things are unlikely to look up till FY16.

Similarly, investors dumped bank stocks as a tight money market had increased cost of borrowing.

Axis Bank, with high loan exposure to power and infrastructure companies, was among the stocks to suffer the most. A year ago, the private lender was trading at a discount of 45% to its 5-year average price-to-book multiple.

“The price plays a pivotal role in LIC’s investment decision. If a stock looks attractive even after factoring earnings de-growth, it becomes a clear buy for an investor with longer investment horizon.

This is the reason why LIC is able to generate higher returns by picking up operationally sound stocks that are punished by the market badly due to their cyclical nature of business,” said Amit Tiwari, portfolio manager at Escorts Securities.

Over the past few quarters, LIC has been consistently paring down its holding in IT stocks. But Infosys is an exception. Till September 2014, the stock had fared badly compared to its peers following adverse analyst reports.

But LIC had been quietly increasing stake in the company – from 3.25% in March 2014 to 4.45% in September 2014. During the same period, it raised its holdings in Bajaj Auto, NTPC and NMDC, which had underperformed in the past few months as most viewed the stocks differently than LIC.