Sen­sex gets sen­si­ble!

Money Times - - -

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).

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