Selling family jewels

One of the largest institutional investors in the stock market, Life Insurance Corporation (LIC), has seen a sharp erosion in some of its prominent holdings. The stock prices of some of its holdings LIC Housing (40%), MTNL (19%), TIL (10%), Empire Industries (13%) and Orissa Minerals (15%) have plummeted between 20% and 60% till date.

In midst of this correction, LIC, headed by managing director VK Sharma, is paring its stake in legacy holding — Axis Bank. Between October 19 and October 30, LIC, one of the institutional promoters of the bank, pared its stake from 12.56% to 12.2% in 12 days, selling 11 million shares worth Rs.6.25 billion. LIC cut its stake even as the stock gained 37%, rising from Rs.441 on January 2 to Rs.607 as of November 2. Incidentally, LIC had sold 13 million shares, worth Rs.18 billion, between May and June in 11 tranches. Overall, in FY19, LIC has slashed its stake in the bank from 13.06% to 12.2%.

The life insurer’s move comes at a time when the bank is facing turbulent times with CEO Shikha Sharma’s tenure abruptly cut short by the RBI. Her departure is linked to the central bank’s observation of lax corporate governance and disparity in reporting of non-performing assets (NPA) over the past two years.

However, post the appointment of Amitabh Chaudhry (54), managing director and CEO of HDFC Standard Life Insurance Company, who will take charge on January 1, investor sentiment around the bank is changing. Analysts expect that with the bulk of the NPA pain now recognised, Chaudhry would focus on growth and maintaining healthy margins. “Further, his rich experience in technology would also be an edge for the bank in today’s increasingly digital world of finance,” states an ICICI Direct research report.

Importantly, the private bank also reported improvement in its asset quality in the first quarter of FY19. Fresh slippages declined to Rs.43.4 billion from Rs.165.4 billion in Q4FY18. As a result, gross NPA and net NPA improved sequentially to 6.52% and 3.09% respectively compared with 6.77% and 3.40%. Its loan book grew by 14.4% (YoY), led by 20.7% and 18.9% YoY growth in retail and SME loans. Net interest margin too improved by 13bps QoQ to 3.46%, led by one-time recovery from NCLT accounts.

Besides brokerages, mutual funds, too, are bullish on the private bank. MFs have increased their stake from 8.40% to 9.99% over the past four quarters. HDFC Mutual Fund has increased its stake from 1.24% in September 2017 to 1.64% in September 2018, SBI Mutual Fund has doubled its stake from 0.75% to 1.47% while Reliance Mutual Fund has hiked its holding from 0.99% to 1.42%.

Foreign portfolio investors have, however, marginally increased their holding to 49.95% against 49.13% in September 2017. Currently, Dodge and Cox International Stock fund, Oakmark International fund and Europacific Growth fund are some of the biggest foreign institutional investors holding 3.35%, 2.49% and 2.78% stakes respectively.

One reason why LIC is on a selling spree could be to offset losses that the insurer is incurring in other financials such as IL&FS, Syndicate Bank and Corporation Bank. With LIC now being made to buy a stake in loss-making PSUs, there is increasing concern over whether the insurer’s capital allocation is coming at the cost of policyholders’ interest.