Street Smart Newsletter Oct'08 (Indian Stock Market) - Indian Bond Market

8/14/2019 Street Smart Newsletter Oct'08 (Indian Stock Market) - Indian Bond Market

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HBJ Capital, India

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2/28

From the desk of Head, Equity Research Cell

Thank You Note To All Our Subscribers.

Debt Market/Funds are in limelight as Equity MarketCrashed!!! Indian Bond Market & Its Future Prospects?

When Equity Goes Down, Bond Market Flourish.

Bond Market : Expected to participate in Next Bull Run.

Are you looking for a great company from bond market,with potential to give 10x return in 3 years (10in3)?

India's debt market could touch $1.5 trillion by 2016

HBJ Capital, India Our Services.

Make the rest follow your path HBJ Capital.


3/28

Dear Investors,

India is a fast growing country with consumption,infrastructure development & outsourcing driving

the growth. Financial sector which is also calledmother of all sector s is helping the entire industryto achieve their growth target. But one of the majorpart of financial sector which is debt market is stillunderdeveloped in India.

The debt market is much more popular than the equitymarkets in most parts of the world. In India thereverse has been true. Nevertheless, the Indian debtmarket has transformed itself into a much morevibrant trading field for debt instruments from therudimentary market about a decade ago.

So, as a part of HBJ Capitals Street Smartnewsletter we have covered debt market whichhas massive potential to create long termwealth, this sector will be in demand soon.

Head, Equity Research, HBJ Capital

Rupees are lot like seeds, you can eat the seeds or sow them. Choice is yours?

From the desk of Head, Equity Research Cell.

In matured economiesdebt market is three

times the size of theequity market. As perthis our debt market

should be $1.5trillion!!!


4/28

Thanks To All Our Subscribers.Lets have a look at our testimony for 10in3 report sent in Sept08 by HBJ Capital

Team..

Now that the recommendation is coming from you, I am definitely going to invest in this company after

going through the detailed research report sent by you. P Mehrotra (Sept 17th)

This one is bigger than previous reports, but it speaks volume, great job. Ramandeep Singh (Sept 19th)

I would like to heartily congratulate the whole team for providing such detailed research. SR Jain

(Sept 25th )

I am not seeing any pt missed in this 10in3 report. good job..keep rocking!! V Raghavan K (Sept 28th )

You guys stands out of the crowd, while whole world is looking at market you are focusing on great

story which will unfold in next few years!!! Ashish Bakshi (Oct 2nd )

I am impressed by its wholesome 360 degree content. It might be a bit long for the impatient lot. H

Shah (Oct 6th )

Too big to digest, but too much info about such a small company, I like your view about every fact of

the company. Bought 10% of my portfolio at average price of Rs50. SP Consultancy (Oct 9

th

)Thanks for the report, I really liked the report, I should say thanks to my friend thru whom I came to

know about you guys. In every 10in3 report you provide flash back on your past 3-4 reco which is great

Jagdish Desai (Oct 16th )

Many more to follow.

A crash really occurs when you suddenly have a violent downturn in the market that thenheralds a lon bull market.


5/28

DebtMark

et/Fun

ds

areinlime

lightas

Equit

yMarket

Crashe

d!!!


6/28

Dear HBJ, Could you Pls brief us onIndian Bond Market & its futureprospects?


7/28

Development of bond/debt market in India

Development of Government Bond Market

Prior to 1992, the GOI bond market did not usetrading on an exchange. It featured bilateralnegotiation between dealers. The market thuslacked price-time priority and the bilateraltransactions imposed counterparty credit risk

on participants. This narrowed down the marketinto a club with homogeneous credit risk.

The major reforms that took place in the 1990swereThe Primary market for G-Securitiesregistered an almost ten-fold increase between1990-91 and 1998-99.

Development of Corporate Bond Market

In the recent past, the corporate debtmarket has seen high growth of innovativeasset-backed securities. The servicing ofdebt and related obligations for such

instruments is backed by some sort offinancial assets and/or credit support from athird party.

Over the years greater innovation has beenwitnessed in the corporate bond issuances,like floating rate instruments, zero couponbonds, convertible bonds, callable (put-able)bonds and step-redemption bonds.

Bond or debt are used synonymously to each other. In layman terms, if you buy a piece of paperissued by govt. (PPF, NSC, Infrastructure or Municipal papers etc) or paper backed by acorporate & rated by the rating agencies and if you get paid x% interest on it with some

maturity period associated. Your paper will be called bond and interest earned will be calledyield on the bond. Interest rate on these papers will be more or less close to our fixed deposits.Risk involved in owning these bonds are very low compare to risk in equity market.

The debt market is much more popular than the equity markets in most parts of the world. InIndia the reverse has been true. Nevertheless, the Indian debt market has transformed itselfinto a much more vibrant trading field for debt instruments from the rudimentary marketabout a decade ago.

As the bull market goes on, people who take great risks achieve great rewards, seeminglywithout unishment. It's like crime without unishment or sex without sin.


8/28

Two segments of debt market

Government Securities Market. It dominates the market in terms of

outstanding issues, marketcapitalization and volume of trade thussetting a standard for the rest of themarket through instruments like floating

rate bonds, zero-coupon bonds, treasurybills and state government bonds.

At 38% of GDP, the Indian governmentdebt market compares well with marketssuch as Thailand, Singapore, Malaysiaand PRC.

In absolute terms, however, given Indias

greater overall size, the Indiangovernment bond market is considerablylarger than most other emerging EastAsian markets.

In the 1920s you could buy stocks on margin. You could put 10 percent down and borrow the resta ainst our stocks.

Corporate Debt Market (PSU Bonds andPrivate Sector Bonds). It encompasses private corporate debts

consisting of debentures, fixed deposits,bonds issued by private sector enterprises,commercial papers and other institutions

relating to financial and infrastructuraldevelopment.

The corporate bond market is lessdeveloped than most in emerging EastAsia, with private placements dominating.

At 3% of GDP, corporate bonds arecomparable to levels in the Philippines and

Indonesia where corporate finance is lesswell developed. In absolute terms Indiascorporate bond market is minuscule inrelation to its economic size.

Historically, India debt market has suffered a severe neglect of policymakers in spite of thefact that India has a fairly strong debt preference among households for their financialinvestment portfolio.


9/28

The Structure of the Indian Debt Market

How retail investment in debt securities will increase?

Returns on G-securities have increased to approx 8-10 per cent per annum currently for long tenure bonds. Thisis more than the comparable rate on small saving tools like post office monthly income schemes and KVP.

The regulatory authorities are trying to being a trading platform for debt securities, thereby impartingliquidity.

Equity return expectation is being scaled down due to equity market crash.

There are efforts to boost the tax-free municipal bonds market in India.

Debt Market is among the largest segments in countries like the US in terms of retail participation.

In the 1970s we saw a massive shift of household savings from the banks to the brokeragefirms.


10/28

FIIs shift focus on government debt market FIIs shift focus on government

debt market, SEBI also hiked the

investment limits in bonds.

SEBI recently hiked the investment limit for FIIs to$11-bn in the domestic debt markets, which includesup to $5-bn in the government securities and up to$6-bn in the corporate bonds.

These FII funds, which were initially channelizedinto the stock market, may now find an entry intothe debt market.

FIIs have two routes to enter India. One is the 70:30route for equity, for FIIs, who can invest amaximum 30% of the money in debt here. Thesecond is the route for pure debt FIIs, where the

foreign investor has to register with Sebi as an FII.

Foreign banks contributes 26.85% of trade inwholesale debt market.

Mutual funds give people the sense that they're investing with the big boys and that they'rereally not at a disadvantage entering the stock market.

SEBI has hikedthe investment

in debt marketto $11 billion,FII funds areflow to DebtMarket now.


11/28

Opportunity in Corporate bond market.

One of the very nice things about investing in the stock market is that you learn about alldifferent as ects of the econom . It's our window into a ver lar e world.

Corporate bond market is just 3.2% of GDP compare to average 30% for otheremerging market.

India has developed a world-class equities market from relatively unpromising beginnings. Since 1996, the ratio ofequity market capitalization to GDP has more than trebled to 108%, from 32.1% in 1996.

In contrast, the development of government and corporate bond markets has not been so fast: the bond marketgrew to a more modest 43.4% of GDP, from 21.3% in 1996.

In June 2007, the government bond market represented 38.3% of GDP, compared with the corporate bondmarket, which amounted to just 3.2% of GDP.


12/28

But, India has already well developedEquity Market, then why do we needbond markets?


13/28

From where you will finance these developments?

In India, high economic growth has created ample demand for funds from the corporate sector which is reflected insharp growth in Bank credit and increased resource mobilization from the international market. Infrastructurefinancing requirements are large and could not be expected to be met by the banking sector alone.

Commercial banks have managed to fill this gap, but only in a limited way. There are asset-liability mismatchissues that banks must handle. Banks already appear to have significant exposure to long-term funds. Theymay, therefore, not be in a position to support long-term projects in future in the way they have been able to

do in recent years. Inadequate long-term resources can, therefore, act as a constraint on Indias future growth prospects. Several

initiatives to develop the corporate bond market have been taken in recent times.

For widening investor base, the scope of investment by provident/pension/gratuity funds and insurancecompanies in corporate bonds should be enhanced. Retail investors should be encouraged to participate in themarket through stock exchanges and mutual funds.

Stock market corrections, although painful at the time, are actually a very healthy part of thewhole mechanism, because there are always speculative excesses that develop, particularly

durin the lon bull market.


14/28

India rely heavily on Bank loans for finance. Indians prefer bank deposits more than buying

debt papers . They also prefer taking loan frombank only

The total deposits in bank during 2007-08 is close to

$900billion to $1 trillion and is growing at average30% per year.

Corporate debt in developing countries hastraditionally been raised from banks through plainvanilla bank lending. In spite of a well developedregulatory and financial system corporate bondmarkets in India are only 3.2 % of GDP compared toKorea at 58%.

Infrastructure projects are generally are of longgestation periods and financing these through bankloans is not feasible. This is because banks acceptdeposits for 5-10 years and thus cannot give 30-yearloans, as this would create asset liability mismatch.

But a bank would be perfectly comfortable buying a30-year bond if a liquid market exists in case it needsan exit route.

An insurance firm or apension fund would beperfectly comfortable holding on to a long tenurebond but even they would like the flexibility to sellwhich a vibrant secondary market would provide.

Among other countries, the UK has a long-standing bond market, but the European one isstill developing, with financing in many countriesstill being bank dominated. Among developingcountries, it is perhaps only South Korea that has a

reasonably well-developed bond market.

India remains bank-dominated but its financialsystem is transforming rapidlyequity andgovernment bond markets have developedstrongly, while corporate bond markets lag behind.

That strategy of buy and hold, which is the sound and sensible one for the individual, can havever dan erous and erverse effects for the market as a whole.


15/28

When Equity Markets are down? Howdo you expect bond market to flourish?


16/28

When Equity goes down, bond market flourish.

Bonds will be in more demand due to fall in equity. Looking at the past data of wholesale debt market from the exchange, one can easily see that

number of trades & trading value sharply increases from 2000-2004 (4 years), this is the period

when equity market were sluggish and in downturn. When expected returns from equity is low, demand for debt goes high due to its risk free /low

risk and stable return nature.

Once again from 2008 till (God only knows), until equity is in downturn, bond will be in moredemand and this is one of the best time to start investing in companies related with dealingbonds.

The Great Inflation of the 1970s destroyed faith in paper assets, because if you held a bond,suddenl the bond was worth much less mone than it was before.


17/28

Whole Sale Debt Market (high demand) during 2000-04

When news of the crash came, probably a lot of people in small towns and farms across

America felt a sense of grim satisfaction that the sinners had finally been punished for theirwicked ways.


18/28

Is there any Scale of Opportunity inthis sector?


19/28

India's debt market could touch $1.5 trillion by 2016 Opportunity $1.5 trillion

India's debt market can rise nearly four-fold to $1.5 trillion by 2016, but thegovernment will have to push reformsforward, global financial services firmGoldman Sachs has said in a report.

We estimate the total debt market couldgrow roughly four-fold, from about $400billion or 45% of the GDP in 2006, to about$1.5 trillion, or some 55% of the GDP, by

2016, Goldman Sachs said.

Within this, the non-government segmentcould grow nearly six-fold, from $100billion today to $575 billion in 2016, it saidin its report.

Goldman Sachs expected the governmentto introduce some reforms to boost the

debt market. India now has a chance tocapitalize on a favorable domestic andexternal environment in order to pushahead with reforms to promote thematuration of the domestic debt capitalmarket, it said.

Six-fold increasefrom $100 billion

today to $575 billionin 2016 for

Corporate Bonds.

The price pattern reminds you that every movement of importance is but a repetition ofsimilar price movements


20/28

Debt market ~ Three times the size of the equity market.Spreading credit risk from banks balance sheets morebroadly through the financial system (opening up debtfinancing) would lower the risks to financial stability.

The problems in the banking sector can interrupt theflow of funds from savers to investors for a dangerouslylong period of time. Indeed, one of the lessons from the1997 Asian financial crisis has been the importance ofhaving nonbank funding channels open.

In the wake of this crisis, a number of countries in the

region, including Korea, Malaysia, Singapore and HongKong, have made progress in building their owncorporate debt markets. Indian is yet to catch up.

The economic advantages of having a viable private Debt Capital

Market1. It providers access to capital to a broader set of diversification opportunities.2. More active insurance and pension markets, for example, would allow families to spread

investment risks more broadly. In turn, these institutional investors would contribute toenhancing credit price disclosure as they allocate resources into interest-bearing securities.

3. Roughly 80% of the debt market is in the form of private placements. These liabilities arenegotiated and priced on the principles of relationship lending, are issued with virtually nopublic disclosure, and are typically held to maturity by banks.

Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as theconsequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed.


21/28

Increasing the width & depth of debt market.

Public issue of Debt: More than 95 % of the fund raising in the Corporate debt market happens through the PrivatePlacement (Institutional) market route, thus reflecting absence of retail participation in the Corporate debt market.

The Government, along with the capital market regulator SEBI, has recognized this inconsistency, and has madeconsiderable progress in developing a vibrant & active Public Issue of Debt market. This would considerably increasethe size of the Indian debt market.

Increasing share of Corporate borrowing through the Corporate debt market:

The share of corporate borrowing through the debt securities market is showing an increasing trend and has grownfrom approx 10 % in 2005-06 to almost 19 % in 2007-08. This reflects that there are increasing number of corporate

resorting to borrow from the debt securities market as against the traditional loan market. Introduction New financial products in the Debt market

Securitization products; Structured products; Forex products; Retail distribution of debts

Scalability through increased brand awareness, market penetration and service offerings across all categories offinancial services

I rarely think the market is right. I believe non dividend stocks arent much more than baseballcards. They are worth what you can convince someone to pay for it.


22/28


23/28

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24/28

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25/28

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Street Smart Newsletter Oct'08 (Indian Stock Market) - Indian Bond Market

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Transcript of Street Smart Newsletter Oct'08 (Indian Stock Market) - Indian Bond Market