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If it wasn’t for the way the Oil and Natural Gas Corporation (ONGC) stock has behaved, more queries might be raised at the key role played by Life Insurance Corporation (LIC) in the government’s divestment programme.
Starting with the ONGC offer for sale (OFS) in March last year, the government-owned giant has bought 37 per cent of all the shares tendered by the government in the eight companies where it divested, including the one (Oil India) where LIC bought none (see table). In all, it bought Rs 15,600 crore worth of shares, accounting for 42 per cent of all disinvestment proceeds of the government since March 2011.
It has been an investor of last resort more than once, taking as much as 90 per cent of the ONGC shares, a little over two-thirds of all Steel Authority of India Ltd (SAIL) shares on offer, a third of the National Aluminium Company (Nalco) issue and nearly half of the Hindustan Copper and Rashtriya Chemicals and Fertilizers (RCF) issues (see table).
It is only thanks to the ONGC investment, however, that its OFS portfolio is positive overall. The oil and gas major was the single biggest investment by LIC last year, accounting for three-fourth of all its OFS investments. It invested Rs 11,400 crore in ONGC for an additional 4.5 per cent stake in the company, to become its second largest shareholder. This portion is now valued at Rs 12,117 crore, giving it mark-to-market (revaluing assets at current prices) gains of Rs 715 crore, based on its closing price on Thursday. Earlier, LIC owned 3.77 per cent stake in the company.
Excluding ONGC, however, LIC policyholders are sitting on a loss in all these other OFS investments. The LIC value of investment in Hindustan Copper is down 41 per cent, RCF is down 19 per cent and Nalco is down 17 per cent from its OFS price.
The defence
Analysts say such analysis misses the point, for this is only about performance in the short term. “LIC has long-term liability and invests in equities to maximise gains over a five to 10-year perspective. In the short to medium term, a stock might decline due to a cyclical downturn or bad news flow, which is not unusual in cyclical sectors, such as oil & gas and metals,” says the head of research at a leading brokerage house in this city, one of whose clients is LIC.
He says policyholders should worry only if the insurance major invests in companies with poor finances and a questionable business model.
This is not the case with any of these PSUs. All eight PSUs whose OFS hit the streets (LIC did not invest in one) were among the 30 per cent of companies in the BS Financial Sustainability Index published in the latest edition of the BS1000, with three of these — Oil India, ONGC and NMDC — coming in the top 10 per cent in terms of their balance sheet strength.
LIC’s gains on the ONGC investment in the past 12 months seem to validate its strategy of buying when no other big investor is interested in a stock or sector. LIC had taken nearly 90 per cent of the ONGC shares on offer.
Similarly, it is accumulating metals and mining stocks; its participation in the OFS for those such as SAIL, Nalco and NMDC seems a part of this. As of now, it is losing money on its incremental investment in these sectors, in line with a market-wide sell-off in metals. The industry benchmark BSE Metal Index is down 21 per cent during the year so far.
As noted in our earlier report on churn in its equity portfolio, LIC has been accumulating metals and mining stocks for five years. In 2008, its average ownership in the top metal and mining companies was 2.8 per cent. This rose to six per cent at the end of December 2012 and its portfolio includes private and public sector companies. LIC is now a top non-promoter shareholder in all leading metals companies, such as Tata Steel, Hindalco, Sterlite and JSW Steel, beside the government- owned companies in the sector.
