Prelude to LIC’s IPO!

8 Jul 2020 Read 1484 Views
Suppose you wish to sell your house and your potential clients are coming to visit the property, what would you do first? You would make sure that the house looks neat and clean and that all the shortcomings are either resolved or at least they are not openly visible, right? This is important because the valuation of your property will depend upon these factors. With leaking sanitary, chipped paint on walls, broken furniture, cracked walls, etc., you can not expect to sell the house at some handsome amount. No, we are not trying to teach you property dealing.

We are telling you all this because Life Insurance Corporation of India (LIC) is currently involved in something similar. LIC is refining its portfolio ahead of its IPO that is planned for the next calendar year. Companies with lesser market caps are either being removed from the portfolio or LIC's holding is being reduced. This is based on quarterly reports of India's top insurer. What's exactly going on, read on to find out.

What's Going On With LIC?

LIC has slowly filtered out companies with lower market caps and taking actions to refine its portfolio. In fact, it is also raising its stake in larger and renowned companies (which have higher market caps). As per a media report, LIC has reduced its stake to nil (and in some cases to less than a percent) in more than 30 companies since last year. The report also claims that the analysis of this data revealed that LIC's tend to avoid companies with lower market caps and its interest in bigger
companies.

As per the report, around 10% of those companies in which LIC reduced its stake had a market cap of fewer than 100 crores. Also, around two-third of the companies had a market cap of fewer than 5000 crores. Besides this, LIC increased its stake to more than 1% in more than 25 companies last year. Out of these, more than 55% of companies had a market cap of more than 10,000 crores. The stats are explanatory themselves to reveal what LIC is up to before its IPO.

LIC's quality of assets will matter a lot when it launches its initial public offering. Coming back to where we started from, just like you need to repair your house well in order to get a good valuation, the company has to streamline its portfolio before launching an IPO. However, the actions will have repercussions on the investee companies' valuations. But, will all this make LIC's IPO a blockbuster one? We'll have to wait and watch.

Agricultural Produce Industry 
The backbone of the Indian economy, Agriculture, is the primary source of livelihood for 58% of its population. Agriculture and the allied sector employ nearly half of the nation's population and contribute around 16% to GDP. In terms of Gross Value Added (GVA), this sector has observed a growth of 2.1% in FY20. India is the largest producer of milk, jute, organic fibers, pulses, plantation crops, and spices as well. It is the second-largest producer of sugarcane, wheat, rice, vegetables, fruits, groundnuts, and cotton.

Some people are directly engaged while being involved in doing the business of agricultural produce. India has 10th largest arable land resources in the world comprising of 20 climatic regions. The land is unevenly distributed with approx. 32% of total agricultural land is owned and cultivated by 5% of farmers.

Apart from crop production (planting, raising, harvesting), agricultural production includes a host of activities such as aquaculture, floriculture, horticulture, and silviculture, etc. This production is responsible for fulfilling needs and enhancing human life sustainability. The product can be divided into four broad categories: foods, fuel, fibers, and raw materials. Crops and animal products are used for food and animal feed, whereas humans use non-food products such as (clothing, cosmetics, and energy). Farmers and arable land are the most essential resources as they are the starting block of this sector.

It needs initial supplies such as agricultural equipment, credit, seeds, fertilizers, and pesticides, etc. to plant, raise, and harvest crops. These are stored and transferred with available supply chain to dependent companies for processing. Similarly, each segment of this sector is interdependent, where farmers need initial supplies whose produce becomes the raw material for processing firms, and finished goods are available to end consumers.

There are certain challenges this industry faces, such as the high dependency of crops on monsoon and uneven rainfall has restricted its growth. Other factors that hinder the production are inadequate access to irrigation, imbalanced use of soil nutrients, uneven access to modern, lack of access to formal agricultural credit, limited procurement of food grains by government agencies, and failure to provide the right prices to farmers.

Given the participation dependence of a large portion of the population, it is imperative for the government to intervene to promote and develop this sector. To double the farmer's income by 2022, the government of India has launched various initiatives such as Electronic National Agriculture Market (eNAM) by networking Agricultural Produce Market Committees
 

(APMCs) to reduce dependence on intermediaries, tax waiver for five years for farmer producer organizations, Pradhan Mantri Krishi Sinchayee Yojana (PMKSY), Pradhan Mantri Fasal Bima Yojana (PMFBY), Pradhan Mantri Samman Nidhi Yojana, and digitization of primary credit societies. Also, with the permission of 100% FDI, the sector is experiencing development and faster growth, especially in the food processing segment.

The ongoing COVID19 pandemic situation has impacted the industry because of disruption in supply chain and wastage of major chunk of Rabi crops. Many firms were unable to get supplies on time and have to shut down their operations, which directly affected their sales volume and, thereby, profits. The false rumors about the spread of infection from consumption of poultry and related products also impacted the industry. However, the demand for essential commodities remained intact, but the cost of production has increased due to new safety measures and limited
supply chain.

Companies in this sector have diversified their business into various segments such as food processing, seeds, crop protection, poultry, dairy, fisheries, animal feeds, and many more. By looking at the growth potential of this sector, many new entrants, especially young generation players, are entering the market and are giving tough competition to existing players. Many startups are capturing the local market with their innovative and targeted approach, which is proving to be suitable for some and bad for other players in such an underdeveloped sector.

Major growth drivers include consumption demand by the growing population and increasing exports. The companies that have sufficiently diversified their business and have the capacity to fulfill the growing demand with innovative solutions may sustain longer in this sector. To pick a stock in the agricultural products industry, one should consider the following financial aspects:

Operating profit margin: Given the fluctuations in raw material prices and the cost of production, the operating profit margin should
be at least 10%. The Return on Equity (ROE) should be at least 16% (3Yr- Average) 
The better the stock fits in the aforementioned criterion, the better option it would be for investment. It's quite simple; first, the criterion needs to be right to select the right stock. The data regarding the company's revenue, expenses, and financial ratios are available on ticker.finology.in

About the Author: Ratan Deep Singh | 147 Posts

Ratan is a Biotechnology graduate and a former print-media Journalist, who specialized in marketing to take up Brand Communication. He’s a grammar Nazi & big-time foodie who appreciates creativity and often tries his hand in creative poetic writing.

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