Wednesday, November 29, 2023

Jefferies India says LIC IPO can disrupt market balance, terms it near-term risk

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NEW DELHI: Jefferies India believes the upcoming initial public offer (IPO) of Life Insurance Corporation, pegged as the largest ever issue in the country, has the potential to disrupt the market balance.

The insurance behemoth has filed a draft paper for its share sale with the market regulator. The market is expecting approval soon and public bidding will likely start by mid-March. The government, which owns the entirety of stake in the company, is keen to finish the sale by the end of this fiscal year despite unfavourable markets.

“Heavy foreign selling has been absorbed by strong domestic buying, smoothening the market impact. Potential LIC IPO (estimated at $5-7 billion) can disrupt this balance,” Mahesh Nandurkar, an analyst at Jefferies said. He added that, hence, it was a near term risk for the market.

Foreign investors have been bearish on India for a while now. In the current calendar year, they have withdrawn about Rs 52,500 crore from equities, data available at NSDL shows. This is likely due to the surging dollar and dipping liquidity globally.

“The ample global liquidity scenario is already under threat as high inflation is prompting policy reversals,” Jefferies said. “The US Fed will end its QE in March and our US economist believes that seven rate hikes of 25 bps are likely in 2022, followed by four in 2023.”

Inflation has also surged in India, surpassing the tolerance level stipulated for the Reserve Bank of India. It is likely to rise further given the US dollar is hovering at $100 per barrel. But, the central bank has shown little inclination to raise interest rates or increase monetary tightening.

The global broker said this stance perhaps puts the RBI behind the curve. But central bank’s opinion may change very soon, it suggested.

“We note that effective policy rates have already been moved 50 bps higher than the 3.35 per cent reverse repo rate. Nonetheless, RBI’s continued pause on headline rates and a surprisingly low CPI forecast for FY23 has bought the RBI a few months of time,” said Nandurkar.

“The recent crude oil spike, meanwhile, could result in a Rs 6-8/ltr hike in auto fuels, once the state elections get over in early March. These hikes would add about 30-40bps to the CPI. Potentially higher CPI might drive RBI to change its dovish stance over the next 1-2 quarters,” he added.

India has imposed an unofficial embargo on fuel price hikes in the last couple of months as the ruling government doesn’t want to impact surging crude oil prices to ruin its prospects of winning the elections. The prices have not been revised in the last 110 days.

Another risk to the market is the prospect of ‘twin’ deficits fiscal and current account – simultaneously over the next 12 months. The centre’s 6.4 per cent FY23 fiscal deficit target has already caused concerns in the bond market.

“The import surge is quite broad based and recovering local demand, along with high commodity prices, could keep the current account under pressure. We estimate the current account deficit at 2.5 per cent of GDP in FY23 — a 10-year high,” said Nandurkar.

Nifty target at 17,500
Jefferies believe, despite a correction, the Indian headline indices are still expensive. The Nifty trades at a 12-m fwd PE of 19.8x, 6.6 per cent and 19 per cent premium to 5 year and 10 year averages, respectively. Even against the regional markets, Indian valuations are 30 percentage points higher than historical, Jefferies added.

“We look at 10 mean reversion/higher rates scenarios to ascertain where the Nifty would be by Dec-22. The target ranges between 16,500-18,500 with the mean of 17,500,” the broker said, factoring in the above-mentioned risks.

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