Tag: rates

CP market: Improving risk appetite needs close monitoring, says Ind-Ra

Banking & Finance

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Sustained easy money alongside improving risk appetite, as signified by the trend of overall rising number of issuances in the primary Commercial Paper (CP) market, coupled with healthy volumes in the second quarter (2Q) of FY22, requires close monitoring, according to India Ratings (Ind-Ra).

The credit rating agency has noticed certain instances of risks building up in relation to high-rated corporates raising short-term debt to take arbitrage opportunities because of low rates in the CP market.

For India Inc, low-cost CP is preferred route

The risk appetite in the system has improved, particularly in 2QFY22, driven by the strong corporate performance, buoyant external conditions and sustained ultra-loose monetary policy conditions, said Nikhil Changulani, Analyst, Ind-Ra, in a report.

The agency observed that a few large corporates, who have access to CPs at the cheapest cost (sub 4 per cent), are using arbitrage opportunities by increasing the use of CPs and enhanced drawings from some banks, thus opening up risks in the system.

Ind-Ra believes the risks to be presently limited to a few cases; but if not addressed could accentuate and spread to the wider baskets.

CP: market resilient in 2QFY22

Changulani noted that the CP market trend suggests that the market has shown resilience during 2QFY22 amid the uncertain period of the second wave of Covid-19.

“The overall rising number of issuances in the primary CP market coupled with healthy volumes has been the trend. Moreover, the rising number of issuers in a month suggests broadening of the market although there is a concentration risk pertaining to the tenor of borrowings.

Commercial paper issuances by corporates gather steam despite second Covid wave

“The risk appetite in the system has improved, particularly in 2QFY22, driven by the strong corporate performance, buoyant external conditions and sustained ultra-loose monetary policy conditions,” the analyst said.

In September 2021, the number of unique issuers in the corporate and finance segments increased to 74 (69 in August 2021) and 65 (60), respectively. The corporate issuers mopped up ₹73,900 crore (₹60,100 crore) while the finance issuers raised ₹42,900 crore (₹1,07,700 crore).

While the money market rates have remained historically low as a result of favourable environment and assurance from the RBI regarding loose policy stance, Changulani underscored the modest hardening in rates that was visible in October 2021.

Ind-Ra believes a sustained rise in commodity prices worldwide and looming supply-side shortage in various spectrums could pose challenge to the short-term rates.

The report said corporates are emerging from the second wave of Covid-19 and are tapping the CP market positively in anticipation of higher working capital requirement, owing to the high commodity prices coupled with a recovery in capacity utilisation.

IPO financing

The agency underscored that the concentration of issuances in the seven-day bucket is largely due to the initial public offer (IPO) financing in the equity market. On the other hand, three-to-four-month bucket mirrors the nature and origination of fund flows to mutual funds.

Non-banking financial companies (NBFCs) have been gaining the advantage of the excess liquidity and a favourable environment for tapping CP markets to raise short-term debt for financing IPOs, Ind-Ra said.

The months of June, July and August 2021 witnessed heavy activities in the IPO market and many NBFCs were active in funding IPOs.

NBFCs raised ₹59,200 crore in June 2021, ₹1,41,200 crore in July 2021, and ₹1,07,700 crore in August 2021 via CPs.

The agency believes the RBI’s capping of individual borrower’s limit for NBFCs to ₹1 crore for IPO financing would affect the oversubscription of IPOs and reduce CP issuances.

Ind-Ra opined that the spread between banks’ marginal cost of funds-based lending rate and CP rate could remain wide. However, the shorter end of the market rate could start inching up in 3QFY22 based on the expectation (of unwinding ultra-loose monetary policy) from the RBI.

Nevertheless, the wide gap between CP rates and marginal cost of funds-based lending rate will remain a driving factor for more traction by the issuers to tap the CP market in the near to medium term, the agency said.

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Monetary Policy Committee seen keeping rates unchanged with ‘accommodative stance’

Banking & Finance

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Amidst softening retail inflation, the Monetary Policy Committee is expected to keep key rates unchanged and maintain its accommodative stance to help sustain the growth momentum. Some experts believe that there could be steps announced to calibrate excess liquidity.

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, said: “Acuité believes, in line with market expectations, that Reserve Bank of India will continue with its accommodative monetary policy in October although it is likely that it may take some further steps to recalibrate the excess liquidity in the monetary system over the next one to two quarters.”

Economy bouncing back

While the high-frequency indicators for August and September reveal that economic activity is reaching its pre-pandemic levels and the risks of another wave of the Covid are gradually on a decline, the recovery momentum is still uneven, he said.

Retail inflation, as measured by the Consumer Price Index, eased to a four-month low of 5.3 per cent in August with moderation in food prices.

“We expect headline inflation for September to come in at a five-month low of 4.35 per cent,” said a Treasury Research report by HDFC Bank.

“…the RBI is likely to keep its stance accommodative and maintain surplus liquidity in the system. The RBI is likely to wait for growth impulses to get stronger and once domestic and global risks abate (third wave, global supply chain disruptions, Fed taper) before rolling back monetary accommodation,” it said, adding the RBI is likely to continue to manage the yield curve (through GSAP sterilised or Operation Twist).

The MPC, chaired by RBI Governor Shaktikanta Das, is set to meet between October 6 and 8 for the next bi-monthly review. The Reserve Bank had last cut the repo rate by 40 basis points in May 2020 but has since then maintained status quo on rates.

Upside risks to inflation

Economists at Standard Chartered Bank too said they expect the MPC to keep both reverse repo and repo rates unchanged at the October meeting and said it is likely to marginally trim its 2021-22 CPI forecast from 5.7 per cent towards 5.5-5.6 per cent, though upside risks to inflation have increased.

The Standard Chartered Bank report said it expects the MPC to signal reverse repo rate normalisation from December at the October meeting “…in the absence of growth shocks.” It expects the MPC to hike the reverse repo rate by 40 bps (to 3.75 per cent) at the December and February policy meetings.

“The trajectory of inflation is shifting down more favourably than anticipated. As pandemic scars heal and supply conditions are restored with productivity gains, a sustained easing of core inflation can be expected, which will reinforce the growth-supportive stance of monetary policy,” the RBI Bulletin of September had noted.

At the August policy meeting, MPC member JR Varma was the sole dissenter. While he agreed with the other five members on keeping the policy repo rate unchanged at 4 per cent, he disagreed on continuing with the accommodative stance. He had noted that the possibility that Covid-19 will haunt us (though with lower mortality) for three -five years can no longer be ruled out.

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Should you invest in Hawkins Cooker FD opening for booking on September 15?

Personal Finance

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With interest rates bottoming out, fixed income investors have been scouting for options with higher returns. But higher returns invariably mean higher risk. Consider the case of the FD scheme of Hawkins Cookers. The company is offering 7.5 per cent per annum for deposits with a tenure of 12 months. For deposits of 24 and 36 months, the rates offered are 7.75 per cent and 8 per cent per annum, respectively. These rates are higher than many others in the market today.

But the flipside is that FDs of Hawkins are rated ‘MAA’/Stable rating by ICRA. While this rating implies high credit quality and low credit risk, it is a couple of notches below the highest rating of ‘MAAA’ — indicating that the Hawkins deposit has higher risk than the safest deposits in the market today.

Investors who can take such higher risk for higher returns can consider the FD scheme of Hawkins that opens on Wednesday, September 15, 2021. Interested investors should note that they should pre-register for the FDs on the company’s website (https://www.hawkinscookers.com/fd2021.aspx), beginning 9:30 am. Once you register, you will get a pre-acceptance number and the payment has to be made within 10 days, with a filled in FD application form. If the pre-accepted numbers cross the threshold amount (₹28.17 crore) which the company intends to raise through FDs, you will be put on a wait-list. Wait-listed applications will be considered if pre-approved applicants fail to pay within the stipulated time.

At the current juncture, locking into deposits with longer tenures could mean missing out on higher returns when the rate cycle begins to move up. A one- to two-year time-frame hence, seems better, as this could perhaps give the opportunity to reinvest at higher rates later on.

Why FD investors get the short end of the stick under waterfall mechanism

The company accepts a minimum of ₹25,000 as deposit and in multiples of ₹1,000 thereafter — up to a maximum of ₹20 lakh. Investors can choose from the cumulative and non-cumulative options. Under the former, interest will be compounded at monthly rests and paid on maturity, along with the principal. A deposit of ₹25,000 will fetch ₹26,941/ 29,177/31,756, at maturity, for tenures of 12/24/36 months, respectively. For non-cumulative deposits, interest will be paid out on half-yearly basis.

Given the relatively higher risk, it is recommended that investors restrict their investments to the minimum amount. Also, it will suit those with a bigger investible surplus on hand as they can park only a portion of their surplus here.

Better rates than others

The interest rates offered by Hawkins are relatively higher across tenures. For a 12-month deposit, while public sector banks offer 4.25-5.15 per cent, private banks offer up to 6 per cent, and small finance banks (SFBs) offer up to 6.5 per cent — Hawkins offers 7.5 per cent. For tenures of 24/36 months, banks currently offer up to 7 per cent, while Hawkins offers 7.75 and 8 per cent, respectively.

But the relatively lower rates offered by banks on their deposits are commensurate with their relatively higher safety. FDs with banks (including those with SFBs) are covered under the deposit insurance offered by DICGC, for up to ₹5 lakh per bank. This cover is not available for corporate FDs such as those of Hawkins.

The rates offered by Hawkins are 150 to 220 basis points higher than those offered by NBFCs, such as Bajaj Finance and Sundaram Finance. But these deposits have a higher credit rating (AAA), indicating better safety.

Even among its peers with about similar rating, the rates offered by Hawkins score better. For instance, Shriram Transport Finance’s deposits, rated MAA+ by ICRA (also rated FAAA by CRISIL), offer 6.5/6.75/7.5 per cent per annum and tenures of 12/24/36 months, respectively. JK Paper has a similar rating (‘FAA’/Stable by CRISIL), but the interest rates offered by it are 50-75 basis points lower than those offered by Hawkins, across tenures.

About the company

Hawkins is one of the leading manufacturers of pressure cookers in India with a wide distribution network (the brand has second highest market share of 34.9 per cent). The company has also diversified its product portfolio into other cookware products that constitute about 20 per cent of its turnover.

However, Hawkins is a small company, both in terms of turnover and market capitalisation (₹3,281 crore).

While the company’s revenue grew by 10.3 per cent compounded annual growth rate (CAGR) over FY16 to FY19, the growth was muted in FY20 — 3.2 per cent (y-o-y) to ₹674 crore, owing to the Covid-19 lockdown restrictions in March quarter. In FY21, however, with the company upping its online presence, sales saw a re-bound and grew by 14 per cent (y-o-y) to ₹768 crore.

Net profit grew by 14.5 per cent CAGR over FY16 to FY21 to ₹80.6 crore.

Hawkins plans to meet its working capital requirements from this FD scheme, apart from using the money as a buffer for any unforeseen exigencies. The company has unencumbered cash and liquid investments of ₹167 crore in FY21 compared to ₹48.5 crore as of March 31, 2020, owing to shorter debtor turnover days during the year (revised policy in FY21). Besides, as per ICRA’s rating rationale, the company also has largely unutilised working capital limits, which provide a liquidity cushion.

The company is net-debt free, and its debt to equity ratio is healthy at 0.13 times as of March 2021.

All you wanted to know about NRI bank fixed deposits

While the lockdowns initially impacted the sale of its products, the WFH scenario has helped boost their demand, thereafter. In the recent June quarter, the company’s top line soared by 50 per cent over the year ago period to ₹151.45 crore. Besides, while continuing fixed costs despite abysmal sale volumes and rising input prices dented its profits last year, the company raised prices by 5-10 per cent this year. Following the price rise and sales getting back to normal, its net profits inched up to ₹17.13 crore during June 2021 quarter, compared to ₹6.45 crore in the corresponding quarter last year.

Conservative investors who prefer full safety of capital over returns may avoid this offer, given its lower credit rating and the unsecured nature of the deposits.

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