CFOs Bullish as Yields May Drop From Two-Year Low: India Credit

Indian companies are predicting borrowing costs will fall from a two-year low as the central bank cuts interest rates, supporting a rebound in earnings.

“The central bank and the government are both moving towards reviving the economic environment,” Madhav Nadkarni, chief financial officer at Unity Infraprojects Ltd., a Mumbai-based builder of roads and bridges, said in a telephone interview on Feb. 1. “Corporate borrowing costs are off peaks and an eventual further drop is inevitable.”

Yields on five-year AAA rupee corporate bonds fell 39 basis points in a year to 8.95 percent on Feb. 1, the lowest since January 2011, indicative rates compiled by Bloomberg show. Similar rates climbed 36 basis points to 4.84 percent in China. Reserve Bank of India Governor Duvvuri Subbarao reduced the repurchase rate on Jan. 29 to 7.75 percent from 8 percent and said he sees some room for further monetary easing.

JSW Steel Ltd., India’s third-biggest producer, real-estate developer Unitech Ltd. and the Confederation of Indian Industry said last week that policy easing by the RBI complements Prime Minister Manmohan Singh’s economic policy overhaul aimed at reviving consumption and investment. Reliance Industries Ltd., India’s biggest company, reported its best profit gain in two years last month as 73 percent of the firms in the BSE India Sensitive Index posted earnings that beat estimates.

Rising Earnings

Asia’s third-largest economy, forecast by the central bank to grow the least since 2003 in the 12 months through March, will improve next fiscal year as policy makers act to spur consumption and investment, according to Credit Agricole CIB. Larsen & Toubro Ltd., India’s biggest builder of power networks and airports, Maruti Suzuki India Ltd., the biggest carmaker, and NTPC Ltd., the largest power producer, last month reported earnings that exceeded analysts’ projections.

The RBI has lowered its benchmark rate by 75 basis points in the past year, after boosting it by an unprecedented 375 basis points, or 3.75 percentage points, through 2010 and 2011 to contain inflation. The central bank has also pumped almost 3 trillion rupees ($57 billion) into markets in the period by reducing lenders’ reserve requirements and buying sovereign debt to ease cash shortages and cap funding costs.

“Growth-oriented monetary measures combined with the government’s fiscal measures should augur well for the industry in 2013,” Sanjay Chandra, managing director at New Delhi-based Unitech, said in an e-mailed statement on Jan. 29.

Policy Support

Subbarao’s steps supported those of Prime Minister Singh, who in the past four months cut energy subsidies, opened up industries including aviation and retailing to foreigners and reduced taxes on companies’ overseas debt. Finance Minister Palaniappan Chidambaram said on his tour of Asia and Europe to woo investors in January that fiscal prudence will be a key theme of his budget this month, and pledged to deepen the nation’s economic-policy overhaul.

Growth stimulus measures by policy makers in developed nations also helped bolster local business confidence, according to FirstRand Ltd., South Africa’s second-largest financial services provider. Central banks in the U.S., Europe and Japan have expanded asset-purchase programs since September to release money into their economies and markets.

“Demand in the economy has picked up as the reforms have improved sentiment,” Harihar Krishnamoorthy, Mumbai-based treasurer at the Indian unit of FirstRand, said in an interview on Jan. 31. “A return of relative stability in the world’s largest economies is also helping.”

Lower Yields

State-owned Airports Authority of India, India’s biggest airports manager, issued 5 billion rupees of 2018 notes at a three-year low rate of 8.6 percent last month, data compiled by Bloomberg show. Indian Railway Finance Corp., the finance unit of the state rail network, sold 10-year notes at 7.19 percent in December, compared with as high as 9.57 percent in 2011.

The yield on India’s 10-year government debt has slid 64 basis points since the end of 2011, compared with a 15 basis point increase in similar rates in China, data compiled by Bloomberg show. The amount paid by the benchmark 8.15 percent note due June 2022 climbed two basis points to 7.93 percent today, while the rupee gained 0.3 percent to 53.015 per dollar. Indian bonds due in a decade pay 590 basis points more than similar-maturity U.S. Treasuries.

Rupee-denominated sovereign bonds returned 11.2 percent in the past year, the most after Philippine securities among Asia’s 10 biggest local debt markets tracked by HSBC Holdings Plc.

Lending Rates

While bond yields have fallen, declines in bank lending rates have lagged cuts in the RBI’s benchmark rate, limiting cost savings for companies, according to Mumbai-based Axis Bank Ltd., last year’s No. 1 rupee debt arranger.

“There’s a sense that things will get better from here but so far, funding costs haven’t really come down, as shown by banks’ base rates,” Parthasarathi Mukherjee, treasurer at Axis Bank, said in a Jan. 31 interview. “The jump in earnings has largely been due to improvement in business sentiment after the spurt in government reforms.”

State Bank of India, the nation’s largest lender, reduced its main lending rate by 30 basis points since the end of 2011 to 9.70 percent, even as the RBI cut its repo rate by 75 basis points and lowered banks’ reserve ratio by 200 basis points.

Bond risk for Indian companies fell in the past year. The average cost of five-year credit-default swaps insuring against non-payment by seven local issuers dropped 170 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.

‘Liquidity Injection’

The central bank and the government may need to do more to sustain the improvement in confidence and revive growth, according to Seshagiri Rao, Mumbai-based chief financial officer at JSW Steel.

“More liquidity injection by the RBI is the need of the hour,” he said in an e-mailed statement on Jan. 29. “The transmission of lower interest rates to borrowers in response to cut in repo rate should take place swiftly as the banks have already reduced deposit rates. We also wish the government to push reforms as this would improve the business sentiment, spur investments and create more monetary space for further easing.”

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