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Rajat Sharma { Investment Strategy: Rajat Sharma on ITC, LIC IPO and State of the Market

By on May 15, 2022 0
“The big story remains in tobacco and cigarettes and it would pick up considerably in the future,” says Rajat SharmaCEO, Sana Securities.

Some of the new era tech companies like Policybazaar, as well as MapMyIndia are making a bit of progress now. After the blows all these stocks took earlier in the year, does it make sense to look at them with fresh eyes?
I do not think so. I was on your show before each of these IPOs launched and for all of them I said it was a horrible idea and I’ll tell you why I said that. Zomato may be an exception. I’m not going to say Zomato is a bad company just because the stock has fallen, but other than that, look

. Where do they really get their income from? I know it’s a brand with an identity and everyone has it on their phone and I guess that’s why everyone wanted to own some of it.

But what are the revenues really and how do they plan to increase them? They do a lot of things that a lot of other companies do better and the only essential thing they do is help people transfer money because their UPI codes are all over the place and that’s not really a reason to invest in a business. It’s a great product and one can use it, but why should the business generate higher revenue or, indeed, revenue for that matter?

Also Read: Rajat Sharma Explains Why He Will Avoid Financials & L&Ts, Buy FMCG Stocks Now

I can still understand Policybazaar. This is at least part of the insurance premium when they sell insurance. But this is not true for most other stocks. I don’t know why a lot of people were so excited and why these IPOs were oversubscribed. My view has not changed at all on any of these points.

This very week we had some of the listings as well as IPOs for Delhivery, the opening of Venus Pipes. We also have the IPO LIC number. What would be your suggestion for people who got LIC IPO award? Are you looking for a pop list there? Regarding Delhivery, would you recommend a subscription?
The only IPO in recent times that I have liked is the Campus Footwear IPO. I looked at their accounts and their books. Sounds exciting.

But apart from that, we are talking about LIC. I think it makes sense for retail investors to sell it if they get a quote at a higher price i.e. they get a pretty good discount from the price range offered by the company . That said, if you cause the business to be priced high, you should sell it and get away with it. If you don’t, the business opens at a discount, and you should think about why you wanted to apply for it in the first place.

It’s a business that doesn’t need money. The government wanted to achieve its divestment goals and that is why it did this IPO. They are constantly losing market share to HDFC, ICICI. We have a financial distribution department in my own company and I see a lot of people interested in buying

ICICI policies and policies because the products are better, their IRRs are high. LIC takes a back seat. If you don’t want to buy a product from a company, why would you want to be a shareholder of that company? Doesn’t make any sense and I really don’t understand why would you expect the company to open at premium because they are three times oversubscribed and offered a good discount? But yes, after the open at premium, you should ideally take advantage of it and exit.

Let’s talk about ITC. The rebound has been evident, but what is your outlook for individual businesses?
I think the company will do quite well in the future and the reason is simple. Like I said, I like companies that are cash-rich, have no debt on their books, and make no mistakes. Cigarettes are still their biggest business and I think cigarettes as a business struggled a lot until about four years ago because there was a constant upward revision of excise duties on the tobacco, then there were two years where we had Covid and a lot of people give up on smoking during those years.

Many people quit smoking at this time because cigarettes were unavailable or marketed on the black market. But none of that comes to business. I am confident that as the world opens up, volumes and sales of cigarettes will increase in the future and that is the biggest part of their business. Buying this stock right now for someone like me, who is looking for safety of principal first and a reasonable return on money deployed, you get the stock at a 4.5% dividend yield. if it goes down any further.

I am convinced that this stock will do very well in the future. In terms of non-cigarette verticals, their non-cigarette FMCG business is finally promising. Hotels are struggling and will continue to struggle, but it has never been a big deal for ITC. It’s more of a liability. I think at some point they should seriously consider listing it separately. But we haven’t really looked at that aspect of ITC selling wheat to Middle Eastern countries because of the Russian-Ukrainian crisis. I don’t think that’s a reason I’m going to consider buying ITC because things just keep happening from time to time and won’t last forever.

The big story remains in tobacco and cigarettes and it would pick up considerably in the future.

Do you think once the LIC is done some of that subscription money is going to go back into the market or not and by then do you think we would see some relief at the overall market level?
It depends on how LIC’s IPO goes. If it opens at a premium and its price drops, some of that money could flow back into the market. In the past we have seen that in these biggest IPOs in India with really famous brands and companies, the money is taken out of other stocks and stock markets in general and goes there, but that money never comes back never really.

So even before the IPO, there was a lot of news that a lot of money was taken out of the markets because a lot of people were trying to block the money for the LIC IPO. I don’t think that really ever happens. It is more likely that this money will be permanently lost and that LIC will benefit from it, because it is essentially this money that is invested in LIC. The company takes the proceeds and what’s left are people trading publicly traded stocks.

After listing, some will want to sell their stock and buy something else at the same time there will be someone else buying that stock. Thus, the money will continue to flow between actions. An IPO is a perfect mechanism for money to exit completely or be invested in businesses. I don’t think people are going to sell and recover or it will push the markets up.