Nepse’s benchmark index has actually breached 1200 levels  

Nanda Kishore Mundara does not require any introduction to those who are actively involved in the share market. One of the oldest and largest stock brokers in Nepal, Mr Mundara was himself a big share investor at some point. Also the former president of the Brokers’ Association, he knows the market inside out, and offers a lot of insight for the stakeholders, especially investors who are interested in the insurance sector.  ShareSansar brings an exclusive interview with Mr Mundara for the benefit of our esteemed clients and viewers:

 
As one of the oldest and largest stock brokers in the country, how do you see the development of the stock market in the country? Is it getting more mature over the recent months after the bubble bursts in the past?

The share market has crossed its teenage. It is already 20 years old. Over the years it is getting mature, but not as mature as it should have been by now. Nepal’s turbulent political situation has stunted the growth of the share market. Due to political instability, economic reforms could not be carried out effectively. On the contrary, at one point, a party with new ideas, which was at the helm of power, dubbed the share market as a “gambling house”. This almost dealt an unsettling blow to the fledgling market, and investors began to doubt if the share market will be shut down in course of time. Thankfully, the market is improving over the recent months.

At this point, the operation of CDS is of paramount importance to give impetus to the share market. But it is taking too long to get operational. Political bickering is responsible for the delay since the key post at the CDS is filled up through political appointments.  Hence as long as there is dearth of political will to reform and upgrade the stock market, it cannot grow in the desired pace. Now that the pro-market Nepali Congress is leading the government, we hope it will pay due attention for early operation of CDS and carry out other reforms needed in the sector.

You are among the leading brokers especially when it comes to the trading of shares of insurance companies.  How do you standout in this sector among the competitors?

Where did you get this idea from?

We keep tab on the floor sheets and other development in the market.  That’s how we came to know that you are a big broker vis-à-vis scrips of insurance companies.

We do the trading of shares of all the groups listed at the stock market, and not just insurance group. Yes, I like dealing in shares of the insurance company since I have extensive experience of the sector. Around 12 years ago, I was the first public director of one of the leading insurance companies — Nepal Life Insurance Company Limited.  That gave me considerable insight into the insurance sector, and I saw a tremendous prospect for the growth of the insurance companies, which was a fresh sector back then. This further encouraged me to trade in the scrips of insurance companies in the market largely dominated by BFIs. And all my clients who followed by suggestion to opt for the scrip of Nepal Life must be thankful to me. What we also need to realize that the insurance sector is still is a virgin sector in the country. Only 3 percent of the total population is covered by life insurance schemes.  Though you cannot expect life insurance to cover cent percent of the population, we still have a long way to go.
Even in India, life insurance covers around 20 percent of the total population. If we are to take this as a yardstick, Nepal’s life insurance sector is yet to cover 17 percent of the population. This shows that the insurance companies are just beginning to grow.

Another reason for me to focus on the shares of NLIC and other leading insurers is that the background of promoters and managements of these companies. While many BFIs are ridden by poor corporate governance and other scandals, these companies have been growing smoothly and are offering handsome dividends to the shareholders.

But there are other insurance companies, especially in the non-life insurance sector, which are struggling.  

Yes, there are a few companies, which have not been able to grow as they should have basically due to their internal problems. As a matter of fact I am not fully satisfied with the pace of growth of even NLIC.

On what basis? We feel that they are already overpriced if we consider their returns?

You should not only think about the current financial position of the company when it comes to investment in share market. You have to look at the future and formulate a long-term strategy. For instance, people are still willing to buy the scrips of Unilever Nepal even though its share price has crossed Rs 10,000. Why? Investors know that it is a growth-oriented company, and will continue to grow further in future.  Similarly, insurers such as NLIC and LICN are also growth oriented; they will continue to grow in years to come.

I will give an example. Back in 2058 BS, one my clients had bought 1 lakh units of NLIC scrip in the market at around Rs 110 considering the company’s prospect.  There wasn’t much charm for the big investors in general in the scrips of NLIC at that time since they knew that the company will not give any significant dividend for ten years.  But my clients, on my suggestion bought the scrips as we knew that the company can deliver after ten years.

But even some 25 months back, investors were not willing to buy the share of a leading insurer like NLIC even for Rs 700 when the NEPSE benchmark index stood at around 350 levels. Today it is hard to find the same scrip even if they want to pay up to Rs 4,600 at a time the benchmark index hovers around 800, and that the company has already distributed dividend for the last fiscal year. Many shareholders feel that the scrips of some insurance companies such as NLIC are surging due to artificially created supply side constraints by some brokers and other stakeholders?  What do you say?

The supply side crunch is there basically because the shareholders of the company are not willing to square off the shares considering the future prospect of the company. If you have been closely following the market then you also realize the price of scrips of each and every company is determined by the dividends they offer.  

On top of that the Insurance Board will sooner than later ask each of the seven life insurance companies to shore up their paid-up capital to Rs 200 crore. They have to shore up their paid-up capital because they have life fund of around Rs 20 arba. NLIC’s life fund stands at Rs 16 arba, something like the reserve of the commercial bank. The banks, which started off with a paid-up of Rs 4 crore, now have a paid-up of up to Rs 300 crore.  Similarly, the insurers will soon have paid-up capital of Rs 1,00 crore.  Hence, today you can buy the share of NLIC costs around Rs 4,500; tomorrow you won’t be able to get it even if you willing to pay Rs 10,000.

By when do you think that the life insurance companies will be asked to shore up their paid-up capital to Rs 200 crore?

Though the Insurance Board must be mulling over it, there are rumors in the market that the insurer will be asked to shore up their paid-up capital to Rs 200 crore by 2075 BS. I think the big life insurance companies should be asked to raise their paid-up to Rs 100 crore by next year. There are rumors in the market that some leading companies may announce this through their upcoming AGMs.

Since the company is yet to hold the AGM, how much dividend will it be offering, in your view, to raise the paid-up to Rs 100 crore?

The rumor in the market is that NLIC will again pledge bonus shares similar to what it offered for the last fiscal year.

Let’s not just talk about the leading companies. Why are the shares of some insurance companies much below those of the leading ones?  For example, why is the share of Gurans Life Insurance is priced below Rs 500 despite offering good dividend.

When we look at a life insurance company, we should basically focus on its life fund, and not just dividend it pledges. The bigger the life fund, the better the dividend and the possibility of its growth.  For instance, Surya Life’s life fund is still below Rs 100 crore. It is a relatively new company.

Another good thing about the established life insurance companies such as NLIC and LICN is that they are very aggressive when it comes to their business. Look at their marketing and premium of policies. The big insuers cover 67 percent of the total market.  

What are the best scrips to go for in your perspective?

These two insurance companies – NLIC and LICN from the insurance group.  RMDC and SKBBL are very good companies from the microfinance sector. Shree Investment and United Finance are promising companies in the finance group. Among the commercial banks, I prefer Everest Bank Limited and Prime Commercial Bank, besides Nabil Bank. I prefer Nabil Promoter shares over the ordinary shares. Nevertheless, the ongoing plan for conversion of the promoter shares to ordinary share makes commercial bank’s scrip a bit dicey. Nevertheless, if the central bank comes up with a policy to ask all the commercial banks to shore up their paid-up capital to Rs 500 crore than all of them will fare extremely well. In so far as the hydropower group is concerned, I will go for Sanima Mai, besides, of course, Chilime.

All the 50 brokerage firms in the country are basically based in Kathmandu. How do you, also as the former president of the brokers’ association, think that the broker outreach can be expanded so that people across the country can benefit from the stock market?

Look even if we are allowed to go out of the capital under the prevailing circumstance infrastructure, it is not going to make much difference.  Even in Kathmandu, the transactions are yet to be settled in proper time. At a time when brokers in the capital are still struggling to settle the transactions, it will be very difficult for them to settle the papers from outside the capital.  Full implementation of CDS is the need of the hour.  There is another option, too. If NEPSE gives the Windows-based trading system then we can do the trading from any part of the country.  If they give such a system then we can immediately use sub-brokers for the trading.

How long do you think will NEPSE take to ensure a system that can effectively expand the broker outreach across the country?

 Now that the pro-market government is in place, it should focus on the full-fledged implementation of CDS or a Windows-based trading system. I think it can be easily implemented within two years. If we can do this then we can easily do the trading from Mustang, and not just Birgunj or other relatively accessible places.

What is the main reason behind slacking of the Nepse index over the past few days, despite the market sentiment so high with the pro- market government and the much awaited FM and the surplus liquidity in the overall economy?

What we are witnessing now is the correction phase of the surge in the market following the elections. The market rose by around 200 points in two weeks anticipating pro-market policy. But the fact is that the Nepali Congress-led government has not announced its budget and programs. But the investors were confident about the new government. We were actually expecting the market to breach 800 points toward July 2014, but it has already reached that point and come down.  Hence those who made the profit following the surge must be booking their profit, dragging the market down.

Where do you see the stock market in days to come? What could be the support level of the market now?

Other reasons for the sluggish market could be the selling pressure of the 19 percent of the promoter shares converted to public and scrips held by mutual funds.  Though those holding promoter shares of BFIs had converted their shares many months ago, they were encouraged to square off their shares following the bullish trend, which could have eventually brought the market down.  Similarly, the mutual funds are also off loading the shares they had bought to show an impressive balance sheet by July. They get their real profit from trading, and not from dividends. The market is expected to rise toward May end.

Yet another reason could be the seasonal factor. If you look at the trend of the share market for the last 20 years, you realize that most of the listed companies finish distributing dividends to investors before Falgun, and the investors tend to sell their bonus shares.  The market is always slack in Falgun and Chaitra (mid-February to mid-April).

Will the benchmark index breach the previous high?

It is very hard to make a prediction. A lot depends on government’s policies. Since the government is led by Nepali Congress, the stakeholders have expected a lot from it. But if this government fails to deliver then the future is bleak for the market.  Let’s hope this government will open doors for investment in the country in sectors including hydropower. This will have a cyclic effect, and the overall economy and the market will grow.

Another good thing is that the BFIs are going for merger/ acquisition. With this the number of companies and their shares will decrease. This will transfer companies’ capital to their reserve, which will make them financially stronger. Last but not the least, the best thing that the market has seen is the volume. In the previous years, we were struggling to conduct trading of Rs 2 crore in day. But today we are trading around 25-30 crore.  We have traded up to Rs 72 crore in a single day.

And then there are mutual fund companies that are giving more depth to the market. More mutual fund companies are in the pipeline. I hear that some leading insurance companies are also coming up with mutual fund schemes.

Nonetheless, it is very difficult to say when will the benchmark index breach the previous high. But one important thing that we remember is that the bench mark index is actually much higher than what it reflects. Previously when bonus and right shares were listed, the benchmark index used to decrease. But the current system is different. Even after the listing of such shares, the index does not fall. This means that if the benchmark index stands at 875 levels today, it is actually 1200 levels of the previous system.

Still, do you think it can breach the previous high of 1175 levels of August 2008 in six months?  

I am not so optimistic. On the contrary, the market will require a lot of strength to cross 850 levels. There are many challenges. We are talking about foreign direct investment. But the fact is that it is hard to find a good flow of domestic investment in the market due to various legal hurdles.  There is no dearth of domestic investors. But the government needs to create a favorable environment for the same. To boost the market and the economy, I think the government should make investors declare their property once so that investors can freely invest in the market.

What major changes you think is required most urgently to enhance the overall stock market of Nepal?

Full implementation of CDS is the most urgent thing. Out of 238 listed companies, only 11 companies have demat so far.  Though the brokers have already become the Clearing Members, we cannot trade all the scrips until and unless all the listed get demat. CDS is in interest of all the stakeholders, including investors, brokers and the concerned companies. Our trading volume will increase and the investors will have more liquidity. We won’t have to face the hassles of ownership transfer and verification.

Once the CDS comes into operation, we should switch to Windows-based trading system as I mentioned earlier. Another important thing that the regulator can do is raise the general awareness about share trading. SEBON should educate the people about the benefits of share trading.  Very few people are involved in the share market, and even among those who have bought the shares do not apply for the right shares or collect dividends.

How do you react to the allegations of some investors that brokers drive the market and do the inside trading?

SEBON is there to regulate the market. If you place a buying order and it does not get executed, and then you realize that the broker has been buying the shares, you can lodge a complaint with the regulator. As far as we are concerned, we even record the time a buyer places an order on our order sheet. The entire process is transparent. Personally, I do not believe that any of the brokers resort to wrongful means. We can do trading only if an investor places an order.

On a personal note, why you have been making huge numbers of matching transactions of NBL scrips in the past few weeks?

As you rightly noted all of those transactions were actual transactions. None of them are forced transactions.

Why is there so much interest in NBL scrips now?

Though I have no particular interest in the scrip, my investors see good future of this bank. It is the biggest asset-based bank. ADBL is another such bank. If any other bank runs into serious crisis, they will struggle to pay back to the investors and depositors. But NBL can easily pay the dues by disposing its properties. This effectively minimizes the risk in investment.

Talking about the performance of the bank, I hear that the bank is expected to make a profit of around Rs 80 crore in this fiscal year. Another good thing about the bank is that by mid-July 2016, half of its staff will go on retirement.  Its current staff expense is around Rs 3 arba. So, it will be saving Rs 1.5 arba in staff expense after July 2016.  NBL will start giving dividend within three years by recovering all its losses.  Hence, long-term investors, who strongly believe that NBL shares will rise to the tune of Rs 1,000 are investing in the company now.