Fuel-Linked Fares Seen Cutting Rail Yield Premium: India Credit

Dollar borrowing costs for Indian Railways are forecast to drop from a record low after the government said it would link train tariffs to fuel costs to protect the world’s third-largest rail network.

The extra yield investors seek on the 4.406 percent dollar bonds due 2016 of Indian Railway Finance Corp., the funding arm of the state-owned railroad operator, has slid 54 basis points this year to 191, data compiled by Bloomberg show. That’s the lowest since the notes were issued in March 2011 and less than the average spread of 265 basis points on U.S. currency debt in the region, according to HSBC Holdings Plc indexes.

The oldest Asian rail network’s revenue will increase 14 percent to 1.44 trillion rupees ($26.7 billion) in the year that starts April 1, according to Rail Minister Pawan Kumar Bansal’s annual budget speech yesterday, after it was allowed to raise fares for the first time in a decade in January. That would help IRFC cap borrowings at 151 billion rupees, he estimated, compared with 150 billion rupees this fiscal year.

“Railways should be able to benefit significantly by way of lower funding costs,” Cornel Bruhin, who helps manage $3.9 billion at MainFirst Schweiz AG in Zurich, said in a telephone interview yesterday. “The measures in the railway budget show the government is committed to taking strong steps to lift the confidence of investors and stakeholders in the economy.”

Budget Deficit

The plan underscores the government’s resolve to rein in the budget deficit by paring subsidies that add to losses at state companies. Finance Minister Palaniappan Chidambaram, due to unveil the federal budget tomorrow, has vowed to narrow the gap in public finances even as the economy slows and an election due by May 2014 adds pressure to boost spending to win votes. His goal is a shortfall of 4.8 percent of gross domestic product in 2013-2014, from an estimated 5.3 percent this year.

Indian Railways, which carries 23 million passengers every day, will start linking freight charges to fuel costs from April 1, according to Bansal, as it seeks to cut more than $4.5 billion of losses stemming from below-cost tariffs. That will raise charges for shipping commodities by an average 5 percent, according to the minister.

The railways will lose a record 246 billion rupees in the year ending March 31 from subsidized passenger services, he said, without giving a timeframe for tying fares to energy prices.

“The fuel-linked freight increase is a good move,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “That will over time minimize their losses.”

Expansion Plan

An improvement in finances would bolster Indian Railways’ goal to invest 14 trillion rupees by 2020 to expand and modernize its facilities. It plans to spend 634 billion rupees in the next fiscal year, according to Bansal.

India is boosting efforts to expand its 65,000-kilometer (40,937 miles) rail network as poor transport infrastructure hinders fuel and cargo supplies, thwarting steps to counter the worst economic slowdown in a decade. The nation, which has added an average of 180 kilometers of railroads every year since independence in 1947, plans to add 3,300 kilometers of freight railways by 2017. China aims to expand its network by 29,000 kilometers to 120,000 kilometers in the five years ending 2015.

Indian Railways’ share of freight movement in the country has tumbled to 35 percent from 89 percent in 1951, as network expansion failed to keep pace with requirements and as surging highway construction boosted road haulage. The nation added about 50,000 kilometers of highways since 1999, according to the National Highways Authority of India.

Debt Sales

The train operator last borrowed overseas in October, when it issued $300 million of securities due 2017 at 3.417 percent, data compiled by Bloomberg show. The yield on the notes has slid to 2.80 percent since then, as the first increase in passenger fares in a decade boosted investor optimism the company’s finances will improve. Indian Railways increased freight rates last year by as much as 20 percent.

IRFC will consider a global debt issue after completing a rupee bond sale that’s currently open, Managing Director Rajiv Datt said in an interview Feb. 19.

The company is currently offering 88.9 billion rupees of tax-free rupee-denominated notes, according to a document on the website of Mumbai-based Enam Securities Pvt. That’s its largest local sale on record, according to data compiled by Bloomberg. It raised 72.6 billion rupees selling domestic debt in 2012 and 48.4 billion rupees in 2011, the data show. The firm plans to pay a maximum of 7.38 percent on 10-year notes.

Rupee Yields

The rate on IRFC’s 8 percent rupee-denominated tax-free bonds due 2022 dropped to 7.30 percent this month from last year’s peak of 8.05 percent in May, according to prices from the Fixed Income Money Market and Derivatives Association of India.

Five-year AAA yields in India dropped 18 basis points this year to 8.92 percent, indicative rates compiled by Bloomberg show, while rates on 10-year government debt decreased 23 basis points. The amount paid by the benchmark 8.15 percent note due June 2022 was steady at 7.82 percent today, while the rupee rose 0.4 percent to 53.8925 per dollar. Indian bonds due in a decade offer 595 basis points more than similar-maturity U.S. Treasuries.

Rupee-denominated sovereign bonds returned 11.4 percent in the past year, the most after Philippine notes among Asia’s 10 biggest local debt markets tracked by HSBC.

‘Look Attractive’

Corporate bond risk in India fell this year. The average cost for credit-default swaps insuring against default for five years the debt of seven Indian issuers slid 30 basis points to 240, according to data provider CMA, which is owned by McGraw- Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.

Demand for locally-issued railway bonds may increase as India’s first infrastructure bond funds are set up to help improve access to funding for builders of railroads, highways and power plants.

IL&FS Infrastructure Debt Fund, India’s first fund that buys rail, road and electricity bonds, was started this month by Infrastructure Leasing & Financial Services Ltd., a Mumbai-based lender to transport projects, with a goal to raise $1 billion. State-owned India Infrastructure Finance Co. is also preparing to start a $1 billion infrastructure debt plan and has received approval from the capital markets regulator, according to Chairman and Managing Director S.K. Goel.

“Borrowings will become cheaper for railways as the measures will go a long way in boosting confidence,” Aneesh Srivastava, chief investment officer in Mumbai at IDBI Federal Life Insurance Co., said in an interview yesterday. “The budget is probably is the biggest factor in the recent past that has helped their debt look attractive.”

To contact the reporters on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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