Goldman Picks Reliance as Bharti Favored in Top 10: India Credit

Goldman Sachs Group Inc. recommended India’s Reliance Industries Ltd. and Bharti Airtel Ltd. among its 22 most-favored bonds in Asia, saying it’s time to take advantage of the widest spreads in almost a year.

The investment bank picked Reliance’s 5.4 percent February 2022 notes as one of 12 investment-grade buys while Bharti’s 5.125 percent March 2023 debentures were added to its top 10 junk bonds, analysts led by Hong Kong-based Kenneth Ho said in an Aug. 26 report. The lists include 15 Chinese companies.

Indian dollar-denominated bond yields surged to a 19-month high of 6.52 percent on Aug. 22 as the rupee plunged to a record low on Federal Reserve plans to pare stimulus. Kokusai Asset Management Co. and Aletti Gestielle Sgr SpA say those levels may entice buyers. The spread investors demand to hold Indian securities has widened by 103 basis points to 394 since May 20, JPMorgan Chase & Co. indexes show. Only Indonesian debt premium has increased more in Asia.

“Top-ranked companies in their sectors will attract investors because primarily, people are still willing to view the fundamentals positively,” said Milan-based Walter Rossini, who oversees $200 million of Indian funds at Aletti Gestielle. “Spreads have widened mostly due to external factors and it’s likely they’ll correct soon.”

Rupee Plunge

Markets in India and Indonesia -- the two countries with the biggest external funding needs in Asia -- sold off more than their regional peers this year, New York-based Goldman Sachs said in its report, and longer-dated notes in the former now look more attractive.

Quantitative-easing tapering “will be more benign than the market is pricing, largely because we expect the Fed to compensate by putting more emphasis on forward guidance,” New York-based Goldman Sachs’ Ho said in the report. “Since July, five-year India investment-grade has widened 40 to 50 basis points compared with the 10-year segment of the curve, which has widened more than 100 basis points.”

The Reserve Bank of India engineered a cash crunch in Asia’s third-largest economy last month in an attempt to shore up the rupee. The currency’s 20 percent slump this year threatens to increase import costs and fuel inflation in a nation that buys almost 80 percent of the oil it uses abroad.

India’s Trilemma

Gross domestic product that expanded at the slowest pace in a decade, inflation that’s among the fastest in the world and an unprecedented current-account deficit have created an economic trilemma for India which has prompted global funds to pull some $10.1 billion from the country since May 21. The rupee touched an all-time low of 68.7550 per dollar today.

“The situation may change based on investor sentiment,” said Kenichi Kurahashi, a Tokyo-based fund manager at Kokusai Asset Management, which manages about $38 billion. Indian assets “are looking attractive due to the wider spreads and higher yields” triggered by Fed tapering concerns.

Reliance Industries, based in Mumbai, operates the world’s biggest oil-refinery complex. Billionaire Chairman Mukesh Ambani said in June he plans to spend 1.5 trillion rupees ($22 billion) over the next three years to expand businesses ranging from natural gas to telecommunications.

Its $1.5 billion of 5.4 percent notes due 2022 have lost 3.7 percent this quarter through yesterday, according to data compiled by Bloomberg. Yields climbed 69 basis points, or 0.69 percentage point, to 5.81 percent over the same period.

Bharti Return

Bharti Airtel, India’s biggest mobile-phone operator with an almost one-third market share, raised $1.5 billion in March selling its first dollar bonds since 2004, Bloomberg-compiled data show. The 2023 securities have lost 6.8 percent this quarter, as yields surged 114 basis points to 7.51 percent.

An index tracking 65 Indian dollar-denominated corporate bonds fell 2.4 percent over the same period, Bank of America Merrill Lynch data show. Ten-year Treasury notes dropped 1.8 percent as yields rose to 2.71 percent from 2.49 percent.

Goldman Sachs removed bonds due in 2016 sold by Rural Electrification Corp., Canara Bank and Syndicate Bank, and those due in 2017 sold by Axis Bank Ltd., from its most-favored list in this week’s report because of their shorter tenors.

Morgan Stanley this month reduced Indian bank debt to underweight, saying faltering economic growth will increase delinquent loans. It predicts impaired loans may reach 12 percent of the total by March 2015. India hasn’t had a ratio of more than 10 percent since 2002, World Bank data show.

The prospect of an indecisive election in 2014 means political rivalry may also delay steps needed to restore confidence, investors including Legg Mason Global Asset Management and Landesbank Berlin Investment have said.

Credit Risk

No party has won an outright majority in India’s parliament since 1989, requiring coalitions of parties representing different regions and religious castes to strike deals with each other to stay in power.

India’s creditworthiness weakened this quarter. The cost to insure the notes of State Bank of India, a proxy for the sovereign, against non-payment for five years climbed 96 basis points since June 30 to 371 basis points in New York yesterday, CMA data show. The yield on the 7.16 percent government bonds due May 2023 rose 13 basis points to 8.99 percent as of 10:46 a.m. in Mumbai. It has risen by 154 basis points this quarter, according to data compiled by Bloomberg.

Efforts by the central bank to calm the currency and bond markets have helped improve sentiment, Franklin Templeton Investments’ India unit said in an Aug. 23 report. Yields on longer-dated bonds won’t spike much further and investors with a “longer-investment horizon” can look to benefit, it said.

Foreign investors plowed $131 million back into Indian debt on Aug. 26, only the fourth time they were net buyers since July, official data show.

“With spreads widening, investors are now cherry picking,” said Hemant Dharnidharka, Bangalore-based head of credit research at SJS Markets Ltd. His buy recommendations include 2023 notes in Bharti Airtel and Oil & Natural Gas Corp. “Credit fundamentals are good and at these yields, those names are going to have new money flowing into them.”