It's raining Non Convertible Debentures! What to do? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

It's raining Non Convertible Debentures! What to do? 

A  A  A
In this issue:
» Is another tech bubble brewing now?
» Dr Copper hits decade low amidst China worries
» PSU Exchange Traded Funds (ETFs) to knock doors of investor's soon
» Japan's misery index at 33 year high
» ...and more!

The fixed income investors seem to have their plates full as the non convertible debenture (NCD) market is in a complete euphoria. Right now, at least 8 issues are in pipeline and the ones which have already hit the street have received an overwhelming response. In fact, the NCD issue of National Housing Bank (NHB) was closed on day one itself after it was grossly oversubscribed. Even other NCD issues are garnering considerable investor interest.

With equity markets at an all time high, investor liking for NCDs is a bit difficult to fathom. However, considering that interest rates have little room to go up, investor optimism for the instrument may appear to be correct. Interest rates and bond prices move in opposite direction. Thus, as interest rates fall, investors would realize capital gain on NCDs. Also, many of these issues offer tax free interest. Hence, they have become a flavour of the season.

However, we believe that investors should not get carried away by the euphoria. They should assess the issue structure and the risk return considerations beforehand. Also, these NCDs are not risk free. Their ability to pay interest is dependent upon the financial health of the issuer. Hence, credit rating of the issue and parentage of the issuing company must be assessed.

Further, the past track record of interest payments and whether the issue is secured or unsecured must be seen. An unsecured issue may have a higher return but it also carries a higher risk of default. Lastly, one should assess the liquidity of such issues. If the investor is unable to lock in capital gains due to poor liquidity should interest rates fall, his return expectations could go for a toss.

Even if liquidity of the issue is good, sometimes a fall in interest rates may not result in expected increase in price. That's because the price of NCDs is not just sensitive to interest rates but also the financial health of the issuing firm. If the fundamentals of the issuing firm are poor then a fall in interest rates may not result in a desired increase in price.

In short, investors should consider all these factors before investing in NCDs. And not get carried away by the boom in the NCD market which has stemmed from dovish interest rate expectations.

We have time and again stressed that exposure to any asset class should be a function of one's risk appetite and return considerations. Not that NCDs are inept instruments to invest in. It is just that the risk with such instruments is slightly higher than traditional fixed income instruments like fixed deposits (FDs). Hence, investors should assess their risk tolerance before investing in them. For a complete risk averse investor, FDs would be a better option.

Have you invested in any of the ongoing NCD issues? If yes, what factors did you take into consideration before investing? Share your views in the in the Equitymaster Club. Or post your comments below.

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01:50  Chart of the day
Indian television industry is on the verge of witnessing a game changing event. The game changer being referred to here is DD's Freedish, earlier known as DD Direct Plus that has become the country's largest direct to home (DTH) service. After almost a decade of existence, it is now challenging other brands like Zee's dish TV and Tata Sky.

As can be seen in today's chart, DD Freedish Plus Brand owned by Prasar Bharti enjoys highest number of subscribers with a share of around 18 m. It is followed by Zee TV's Dish Group with subscriber base of around 15.7 m subscribers. While its revenues are paltry as compared to other famous players, DD Freedish stands apart for having the best margins even as the rest of the DTH players are making losses. So what is working for Freedish and not for others? Being the largest and only player in Free to air (FTA) market, Freedish is benefitting from the fact that FTA targets small towns and rural regions, which FMCGs consider to be the next areas of growth.

But will this state owned brand be able to sustain its position in the future? In events like users wanting to upgrade to pay channels, level playing field for private players etc, it is unlikely to hold its position. But what will work in its favour is the fact that it will command free and a huge market that has not been much exposed to television. These are the areas where business is not much viable for other DTH players. However, Freedish should not rest on the natural leverage. Once ad outlay to small towns increases, it might face competition from pay operators that may consider launching free service. That would be another game changer in the TV industry, though certainly not in favour of Freedish.

Private players lag the DTH number game
Subscriber numbers are as of September 2013

We are well aware that the price Facebook paid for acquiring the messaging app giant What's app was indeed very stretched if not astronomical. And this was indeed an indicator that some kind of bubble was brewing in the tech space. However those who still doubt it, here's another proof. LiveMint reports how another dot com firm that debuted last week in the US gained 100% on the IPO price first day itself. What more, even the technology focused Nasdaq index has reached levels last seen during the tech boom of the 90s.

So, is the dot com boom back? Well, the valuations are definitely pointing in that direction we reckon. But do trust dyed-in-the-wool supporters to come out with reasons on why this boom is more sustainable than the previous one. For one, they argue that the internet companies of the last boom were fledgling firms, still in search of a market. Today's stars like Amazon and Facebook however are dominating their industries by a big shot. Besides, the valuations these days are supported by funds which usually have a long term interest. This is unlike the last time where there was a strong spending binge. Both these arguments rest on hollow grounds we reckon. Eventually, it is the fundamentals and the long term growth prospects that move stocks according to us. And more aggressive the assumptions behind growth, the bigger the fall in case they are not met. As a result it is always better to be safe than sorry. Therefore although the firms that have gone up this time come equipped with much better fundamentals, it helps if growth assumptions in valuations are brought down to more reasonable levels.

Well, what would have the legendary value investor Benjamin Graham thought about the tech bubble? We believe he would have argued that valuation needs to based on parameters like book value and earnings that are as close to certainty as possible. The more the valuation is based on uncertainty like say long term growth, the bigger the chance of an investor incurring a loss. May be something to ponder over when evaluating expensive growth stocks, isn't it?

Exchange traded funds (ETFs) have sparked much attention in recent times. But this time it's different. While these funds have been dominated by institutional investors, this time the retail participation would gather momentum. For the government ETFs are set to open doors for retail investors! ETF is a bundled product of varied individual securities. And it proves to be a good risk mitigant particularly during volatile times. Hence, it is emerging as an important investment tool amongst investors. And now the retail investors would stand to benefit too. The government planned ETFs would allow retail folks to invest up to Rs 2 lakh individually. The government's ETF scheme comprises scrips of 10 public sector enterprises; viz, Oil and Natural Gas Corporation Ltd. (ONGC), Coal India, Gas Authority Of India Ltd. (GAIL), Rural Electrification Corp (REC), Oil India, Container Corp, Power Finance Corp, Indian Oil, Engineers India and Bharat Electronics. Also the government would accord a loyalty bonus to the retail investors. Besides they would also enjoy tax benefits with investments into these PSU ETFs. The ETF is expected to go on roll by end-March.

The ETFs have already been quite popular amongst institutional investors over the past decade. Now, retail investors too would increasingly turn to them as lucrative investment options.

The outlook for China going forward does not look too enticing. And this is evident not only from GDP numbers but also from copper prices. China is the world's biggest consumer of copper. Thus there are concerns that a slowdown in GDP in the dragon nation will take a toll on the demand for the industrial metal. As reported on Moneynews, copper has dropped 13% this year, the most among 34 commodities tracked by Bloomberg. Global demand will trail production by 81,000 metric tons in 2014 as per Barclays Plc estimates. Not just that, importing copper into China has become uneconomical given that domestic output is likely to gain. What is more, Chinese banks have slowed the issuance of letters of credit for imports. All of this means that lower demand from China for copper will lead to fall in prices for the metal. Indeed, even the GDP is expected to come in at 7.5% which is much lower than the 9% plus growth that the country was used to in the past.

The big QE gamble that Ben Bernanke undertook in the US, Japanese Prime Minister Shinzo Abe has repeated in Japan. The Bank of Japan initiated a massive monetary stimulus last year. The aim was to boost economic growth and raise inflation rate to 2%. Has the monetary stimulus really worked? As per an article in Bloomberg, the misery index in Japan is set to shoot up to a 33-year high. The misery index, which reflects economic hardship, adds the jobless rate to the inflation level. The misery index is set to rise to 7 percentage points in the three months starting April when Japan increases it sales levy to 8% from 5%. This would punish consumers who are already struggling with a depreciating currency and stagnant wage levels. The cost of living in Japan has shot up to a five-year high. The monetary stimulus may have pushed up asset prices. But it has not been a bane for wage earners and savers.

In the meanwhile Indian stock markets pared gains but remained buoyant. At the time of writing, the benchmark BSE Sensex was up by 43 points (+0.2%). Pharma and consumer durables stocks were the biggest gainers. All the major Asian stock markets were trading negative led by Japan and Hong Kong. Majority of the European indices have opened the day on a weak note.

04:50  Today's investing mantra
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5 Responses to "It's raining Non Convertible Debentures! What to do?"

A K Chhabra

Mar 16, 2014

we applied for tax free bonds of NHAI(one application) and IRFC(two Applications);as retail investors(cat IV), for 10 year tenor.
We have been pursuing the matter with NHAI, IRFC, Karvy Registry and Karvy Stock broking, with whom we submitted three applications, for over a month.
Inspite of repeated reminders, NHAI & IRFC are keeping mum, while Karvy Registry(Karvy Computershare) has washed their hands off, blaming the error in data capturing.
AS AN INVESTOR, WE HAVE ENTRUSTED OUR HARD EARNED SAVINGS(we are senior citizens) TO NHAI & IRFC; AND FOLLOWED PROCEDURES LAID DOWN BY THE TWO PSUs. The two Karvy entities and any other institution possibly involved are essentially the arrangements made by these PSUs, we have no say in that. Karvy Registry has issued allotment advices on behalf of these PSUs.
A K Chhabra

Like (1)

Borkar M.R.

Mar 13, 2014

Dear Sir, Yes. I have recently gone for PSU NCDs. The reasons :(1) With ADVANCING AGE (80+), winding up equity port folio, I assumed is better way out as such surplus funds have been parked in PSU NCDs. It is long term, primarily protected from short-term market swings. Rest all taken care of, the PSUs mind-set up is not conducive to going all out for these bonds. In my view "Corporate Governance is the most important factor. The PSU/its RT Agent do not reply promptly, do not use the communication channel, (details/information which they ask in the application form). I am taking up my case on another platform. But before that I WANT TO GIVE CHANCE to the concerned PSU. The Chairman signed a public statement, No
grievances pending, whereas on that day my complaint (8 month old) has not been replied.- So in my view Corporate Governance is very important point, the investors should consider while putting money in these PSU Bonds. - Borkar

Like (1)

swapan lodh

Mar 12, 2014

yes I have invested in ncds of l&t, tata motors,tata finance,shriram transport fin,etc.,my preference is that issuer is of sound financial standing and issue is duly accredited by good rating agency, and lastly but not the least, the issue is duly backed by issuer`s assets or guaranteed by any third party such as sbi had guaranteed the issue of tata motors.

Like (1)


Mar 12, 2014

This PSU ETF will purchase PSU shares at high rates and pass on the LOSSES to the unit holders. UTI had a PSU Scheme and the unit holders were the sufferers. Prospective investors should be careful of this ETF ; otherwise they may repent for ever ?

Like (1)


Mar 12, 2014

Taking exposure to long term bonds through debt mutual funds is the right way to go for the investors.

Like (1)
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