Anand Tandon on how to play insurance and power generation themes now

What is your take on the insurance pack? What is really changing for the insurance industry, if at all, because this is one of those areas which definitely offers a great opportunity of growth, but nothing much has transpired in the numbers and along with that, there were some regulatory hurdles impacting the growth. Do you believe there is something fundamentally changing for the insurance pack and the companies that are in the listed space? Maybe this is the time to look forward to them?
Anand Tandon: First of all, this is a very large space and earlier we used to say that India is underinsured. If you look at the number of policies sold, it is not so much underinsured anymore, but in terms of the value of the policies, there is still a long way to go and more importantly people continue to confuse investments and insurance.

So, a large amount of the sales of new policies that are happening, continue to be ULIP linked, which is not necessarily the best way to buy insurance. Insurance is a protection product. You should be buying protection. Investments are best done through other structures like mutual funds, etc. But be that as it may, it provides an opportunity for insurance companies to continue to penetrate the market and upscale the size of the policies as well as bring more complexity in terms of the coverage that they are offering.

Given that we are also looking at life insurance companies being allowed to enter into other areas, you will continue to get growth. The biggest of the lot, LIC, for example, is now getting more and more into non-participating policies and there is still some scope for them to increase the retention that they have from even the participating policies. So, overall, the earnings growth can be quite good.

More importantly, the company itself is valued almost at a discount to their portfolio. It is not particularly expensive, either. For the others, growth has not been as secular as one should have expected, and that is mostly because of the fact that we had some challenges suddenly when the regulator that kind of indicated that companies which are related to banks should not be selling their entire products through the banks and so on and the bank assurance business went into a bit of a flux. But that is now back and we should continue to see growth there.

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More importantly, once you bring in a client, the client has to stay with you for years. It is a long-term business which continues to accumulate capital and therefore your ability to generate money out of it. To my mind, it remains one of the core areas for growth and investments on a very long-term basis in the country.Share your thoughts on the power generation theme as well because for the past two to three years, all these companies related to the power space have been doing very well. Yes, the numbers did tell us the story and the reason why they were buzzing, but do you believe it is time for them to take a breather or rather are they fully valued at these price points?
Anand Tandon: If you go back 10 years or 15 years, where you had a situation where everybody thought that it was the pot at the end of the rainbow and everyone set up fairly large capacities and mega plants were set up for power generation, much of which linked to international coal and that became a problem going forward. Then we had the reverse where the growth in the demand was fairly low and for the longest time – almost four or five years – we had a situation where merchant power was trading at below cost perhaps and that had become a problem. Most companies were not willing to get into the distribution of utilities and were not willing to enter into long-term agreements. That too has turned and we now have a situation where you could have bought capacity at, let us say, two to three crores per megawatt which was costing almost a million dollars to set up and now you have got a situation where the market is trading these at multiples of the cost to set up. Both sides of the market tend to overdo whatever it is supposed to.

Currently, the demand for power is quite good and therefore, not much capacity is being added. Things are much more aggressive in the renewable space which is causing problems for the transmission business because until we set up more batteries, transmission is going to be under stress because of the cyclical or because of the non-predictable nature of renewables. So, net-net we have a situation where the power generation companies are putting up new facilities and therefore are going to benefit from that but the ones that are going to get regulatory tariffs like the NTPCs of the world should not be trading as growth sectors because finally a certain amount of value can be attached to the NPV of their future cash flows and that is not going to change very much

These are all PPAs which often last over a couple of decades at least, so the market is tending to treat them as growth stocks. If one has to look at growth, one of the areas that we continue to need more investment is actually transmission where again the likes of Power Grid, etc, have actually got regulated return on capital. There again, they are perhaps overshooting a bit in terms of the capacity they are putting up and the valuation that they are trading at. But overall, at least the numbers will come through.

There is no doubt that as they put up more transmission capacity, that will be fully utilised and therefore, they will get their regulatory return on capital. So, it is a steady business. It is a business which is highly predictable. It is in the growth phase, but the only question is you have to figure out when you are going to be buying them because they are not actually stocks which will show outsized growth beyond what the capacities are.