Sensex gets sensible!
The Sensex breaching the 34000 mark last week reflects the liquidity crunch that has begun to take a toll on the Indian economy. Like all other benchmarks in the world, the Sensex too suffers from the excesses both in euphoria and panics. Such moments are great exit and entry opportunities but seldom can one make the best of them. In simple parlance, the Sensex at the current level seems less sexier but more sensible thanks to the IL&FS payment crisis which engulfed the entire realty and NBFC (non-banking finance company) space. Almost every NBFC, housing finance company (HFC) and realty stock has lost around 40-80% from its top spooking the sentiment beyond an immediate recovery. The woes of Mint Street may soon reach the Main Street. This can be felt from the slowdown witnessed in sale of consumption drivers such as cement, two-wheelers, automobile, tractors, plywood, ceramics, etc. What simply started as tightening of monetary conditions for NBFCs has now snowballed into a crisis of repayments by realtors to HFCs. In turn, such NBFCs and HFCs are defaulting on their commercial papers (CP) redemption. Such a crisis is beginning to hit the economy as funds for investment and consumption are getting squeezed. Economic pundits, therefore, predict a marked fall in GDP growth in Q3-Q4FY19. Hoarding of cash by banks and mutual funds threatens NBFC lending, which is the lifeline of lakhs of small and medium enterprises (SMEs). Added to the woes is the negative impact of macro ills like rising crude oil prices and the depreciating rupee. Its impact has engulfed the entire economy at an alarming rate and is consequently restoring sensibility to the Sensex.
This crisis of confidence has put the benchmarks into reverse gear and the NBFCs yields to jump by over 400 bps. Interest rates on listed Rs.1000 face value of the bonds of NBFCs are discounted between Rs.850 to Rs.977 raising yield to maturity (YTM) from 10.76% to 13.09%. The sentiment has turned so negative that even at such a high YTM, investors are averse to lock their money in high-risk products for the long-term. Yields (interest rates) and prices of bonds are inversely proportional and move in opposite directions. When yields rise, prices fall and vice versa. Lack of confidence may keep listed NCD (non-convertible debentures) prices under pressure and investors may not even touch the fresh issues of such bonds. Earlier, investors had lapped up such NCDs over the last couple of years. But a slowdown was observed last month when Tata Capital bonds with nearly 9% coupon rate could not attract easy subscription. Now as listed bonds YTM increases, it becomes more difficult for primary market issues to sail through. The paradox of shrink in demand for such NBFC bonds despite their high YTM is self-evident. Safety remains the top priority for investors in such a risky environment. Comfort is sought for every Rupee invested but this is missing with most now.
Such a scenario presents an opportunity for risk-takers. In case the crisis fizzles out slowly and interest rates, too, top out within a year, a decent sum of money can be made if you purchase such bonds today. Fortune favors the bold and at Dalal Street, even the bald (experienced).