The top five midcap stocks that LIC holds

Continuing our series on LIC’s top holdings, we look at the insurance behemoth’s top midcap picks today. Let’s start with LIC’s housing finance arm, in which it has a stake of more than 45%.

LIC Housing Finance

Incorporated in 1989, LIC Housing Finance (LICHFL) is among the country’s oldest housing-finance companies. LIC, as the country’s biggest insurance provider, enjoys significant brand-recognition and trust. LICHFL benefits from this and has strong brand recall among Indian consumers.

The association with LIC also boosts the company’s reliability with respect to the custody of documents until the property remains mortgaged during the loan tenure.

Besides lending its brand power to the company, LIC also plays a major role in mobilising its large agent network for LICHFL.

LIC’s backing not only allows LICHFL to use its huge network of agents to originate loans but also source funds at competitive rates. It is also able to raise funds at cheaper rates as its borrowing programs are given strong credit ratings.

As of September, LIC holds a 45.2% stake in the company. This promoter holding has remained constant over the years.

Mutual funds have also taken a fancy to the stock, having loaded up on LICHFL shares for seven consecutive quarters before paring their stakes somewhat in the most recent quarter.

LIC Housing Finance’s stock is currently trading close to its 52-week high of ₹481.

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The optimism around the stock could be attributed to its strong Q2 results, which received a major boost thanks to healthy demand for home loans. The company’s profit after tax more than tripled to ₹11.9 billion from the same period last year.

Following several interest rate hikes, India has kept its key lending rates steady since February, which has caused home sales to pick up.

While the financials may be improving, the company’s loans have grown at barely 4% compound annual growth rate (CAGR) over the past five years. Net profit has also grown at a disappointing 4% CAGR over this period. The return on equity, which was 15-16% five years ago, dropped to 12% in FY23.

From a margin perspective, however, things are improving gradually. The company closed FY23 with a net interest margin of 2.9%. Net interest margin for the full financial year was 2.4% as against 2.2% the previous year.

The stock is currently available for 0.9 times the book value, with a 1.9% current dividend yield.

#2 Rajesh Exports

Rajesh Exports is a gold refiner, manufacturer and exporter of gold products. It is the only company in the world with a presence across the entire value chain of gold, from refining to retailing, and processes 35% of the gold produced globally.

It sells gold and diamond jewellery through its retail chain stores, called Shubh Jewellers.

As of September, LIC owned almost 32 million shares of Rajesh Exports or about 10.8% of the total equity, according to BSE data. It has been increasing its stake in the company since May 2021. However, the company’s recent performance may cause LIC to change its stance.

Shares of the company have been in freefall and are currently trading at their lowest level since 2015.

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The main reason for this could be the company not disclosing its cash-flow statement to the exchanges.

The National Stock Exchange (NSE) has sought clarification from Rajesh Exports for failing to disclose its half-year cash-flow statement and include a proper audit report with its September quarter results.

This has happened previously, too. The company did not put out its audit report and cash-flow statements during its FY23 and fourth-quarter results announcement in May 2023. In the September quarter, the company’s net profit crashed 88% to ₹453.1 million on the back of lower income.

Going forward, the company could see a turnaround thanks to its foray into energy storage solutions. The largest gold financier in the world setting up a battery facility… let that sink in. Here’s what the company’s chairman had to say about it.

“While leading the global gold business, REL is foraying into advanced technology solutions with an aim to provide clean and green energy to the world. REL would be taking all the required steps to emerge as a leading global player in advanced technology solutions.”

The battery business is called ACC Energy Storage Pvt Ltd and is a 100% subsidiary of Rajesh Exports.

In January, Rajesh Exports signed an agreement with the union ministry and the Karnataka government for a 5 GW lithium-ion cell factory. The Karnataka government will give it a tailor-made incentive package for the factory.

#3 Voltas

Voltas is a household name, offering engineering solutions primarily in the air-conditioning market, and a market share of 22.8%.

Apart from catering to the retail market with its cooling products such as air-conditioners and refrigerators, it offers mechanical, electrical, and plumbing (MEP) services and supplies engineering equipment.

As of September, LIC held 10.3% of the total equity of Voltas or around 33.9 million shares of the Tata group firm. Last November LIC bought an additional stake in Voltas for ₹6.4 bn, increasing its shareholding by 2%.

A closer look at the shareholding pattern of Voltas reveals a concerning trend. Foreign institutional investors (FIIs) have been selling its shares for the past seven quarters. Domestic institutional investors have been lapping up shares over the same period. FIIs will be the happier of the two as shares of Voltas have largely underperformed in the year gone by.

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But, as they say, you can’t keep a good player down for too long. Many experts are projecting a turnaround in the stock, given its massive capex plans.

In the past five years, revenue grew by a CAGR of 5.7%. However, the net profit fell at a CAGR of 23.3% due to a rise in the prices of key inputs such as aluminium, steel, copper, and high-density polyethene. As a result, the net margin, RoE and RoCE contracted.

In its recent quarterly presentation, the company said it has taken steps to reduce its costs and improve margins. It also announced the launch of a range of products with enhanced features and quality, and plans to manufacture more value-added products to improve margins.

Voltas has a capex plan of ₹3.5 billion to ₹5 billion for the next 18 months to increase its manufacturing capacity to give million units. It could benefit from the upcoming wedding season in India. The festive season contributes around one-third of its annual sales value. Sales remain elevated beyond this, however, as the wedding season follows immediately after and continues until March. Televisions, air conditioners and refrigerators are all popular purchases during this period.

With so many tailwinds at play, it’s time for the midcap giant to step up its game.

BHEL

The company is a leading manufacturer of power plants in India. Its clients are in sectors such as power, transmission, transportation, renewable energy, oil and gas, and defence. Around 76% of its revenue comes from the power sector and the remaining 24% comes from other areas such as renewables, defence and aerospace.

As of September, LIC held 10.1% in BHEL or a little over 350.8 million shares. It first bought BHEL shares in 2014 through various open-market transactions and increased its exposure ever since. It must be laughing all the way to the bank as BHEL shares have staged a major turnaround and are now trading at multi-year highs.

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Sentiment around the company is so strong that even after posting muted numbers for the September quarter, it still has a heavy order book. Market experts believe that given the healthy pipeline ofthermal power ordersand the moderation in receivables that BHEL is sitting on, the company’s near-term outlook is bright.

As of September, BHEL’s order book stood at ₹1.14 trillion, of which around 71% of orders were from power, 25% from industry, and 4% from abroad. Large orders include those from theVande Bharat projectfor 80 train sets, thermal orders from NTPC and Adani group, and hydro-project orders from NHPC. The company has a wide moat as it manufactures the entire range of power-plant equipment.

AsIndia has shifted focus towards renewables, BHEL is venturing into this arena for a more sustainable long-term strategy. Going forward, the company expects orders from non-coal business segments includingrailways,defence, nuclear, emission control, transmission, and rural electrification.

SAIL

SAIL is one of the largest public-sector companies manufacturing iron and steel in India. Though the government of India owns 65% of the company’s equity, this ‘maharatna’ enjoys operational and financial autonomy. It exports to over 30 countries and has been strengthening its presence in international markets.

SAIL has the most diversified product range of any domestic steel company. It caters to a large number of industries, including power, road and rail infrastructure, oil and gas, irrigation, and airport and port infrastructure.

As of September, LIC held 9.8% in SAIL or about 403.9 million shares. It increased its stake in SAIL in June by buying 2% of the company’s shares through an open market acquisition at ₹66 a share.

SAIL shares have remained range-bound this year, providing little to no direction about its next leg of growth.

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Sentiment around the steel major recently soured following a downgrade from a brokerage house. Kotak Institutional Equities said in a report that the steel major was the most vulnerable to rising coking coal prices due to its high-cost and lower-margin steel business. SAIL’s chairman recently said that the current high prices of coking coal were directly hitting the company’s margins.

The stock is currently trading at a price to book value (P/BV) multiple of 0.7, in line with its five-year average.

The company also has plans in the railways sector. It plans to start trial production of head hardened (HH) rails used in metro rail and freight corridor projects. It has set up facilities to produce HH rails at the new universal rail mill (URM) at its Bhilai Steel Plant in Chhattisgarh. The company also produces forged wheels for the railways at Durgapur Steel Plant in West Bengal. These rails and wheels are supplied to Indian Railways. All this should bode well for the company and when there’s an announcement supporting railway stocks.

Which other midcap stocks does LIC own?

These are just the midcaps in which LIC has the highest exposure. If you do a little digging, you’ll notice that of the total 150 midcap stocks, LIC has exposure to as many as 71, with stakes ranging from 1% to 45%. Here are a few of them.

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It remains to be seen how LIC’s holdings fare in the next few quarters.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com