Big boys of India Inc bet on rate cut

On Tuesday, finance heads and chief financial officers (CFOs) across boardrooms will remain glued to their TV sets to get the right cues from the Central banker.

But the moment the governor finishes his credit policy speech, expect a mad scramble from the poster boys of India Inc over who hits the corporate bond market first.

Clearly, everybody is keen to take advantage of the first policy rate cut in three years.

Starved of cash and halfway into their capex cycle, blue-chip companies from the diversified Aditya Birla and Tata groups are all awaiting the right cues from the Reserve Bank of India (RBI).

According to investment banking and corporate sources, Rs 7,000-10,000 crore (Rs 70-100 billion) of rupee-denominated bond issuances are set to hit the market in the coming days.

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This is the opposite of last year, when cheap capital overseas saw a deluge of dollar- or swiss franc-denominated bonds from storied Indian names like Vedanta, Tata Power, Rural Electrification Corporation and Tata Motors' Jaguar Land Rover.

An investment banking official involved in these issues said: "There is a huge pipeline of bond issues building up from the biggest names.

Most of these corporates have waited for over a year to get clarity on RBI's stand on growth and inflation.

Hopefully now, the central bank will oblige India Inc. And I am quite sure, issues by the Tatas and the Birla group will give a boost to many manufacturing groups to tap the route, as the cost of capital won't come down in a tearing hurry."

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Bonds will have twin advantages. "On one hand, cost will be lower. Also, it'll improve sentiments and increase the scope for higher subscription," said another banker at a large European bank in India, which is active in the debt market.

Hindalco, the flagship company of the Aditya Birla Group, seems all set to go off the block first, hitting the market on Tuesday itself.

Sources said the company was planning to raise Rs 1,500 crore through a 10-year bond issue that will have a 100 per cent green shoe option and a likely coupon rate of 9.8-9.9 per cent, making it the largest such issuance from an Indian private company with a double AA rating.

The issue size may increase depending on the market mood and policy announcements.

"They are not disclosing the exact amount. But they may increase the issue size to Rs 6,000 crore (Rs 60 billion) depending on the market mood," said an investment banker helping the issue.

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Company officials refused to comment on the specifics, but said, "We have always maintained for the Aditya Project and other ongoing projects, we'll look at both bank lending and bond markets."

Hindalco has an ambitious Rs 40,000-crore (Rs 400 billion) capex plan for its various greenfield and brownfield expansion plans till 2014, including the 1.5-million tonne, Rs 6,000-crore (Rs 60 billion) Aditya alumina refinery project in Odisha's Rayagada district.

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The Tata group is also aggressive, with three of its companies, Tata Steel, Tata Motors and Indian Hotels, planning to join the bandwagon.

Tata Steel, said sources, would raise Rs 3,000 crore (Rs 30 billion) via a structured bond of 10 years, while Tata Motors and Indian Hotels are planning to raise Rs 600 crore (Rs 6 billion) and Rs 400 crore (Rs 4 billion), respectively.

"We'll raise the money, rate cut or no rate cut. But obviously, any downward revision will help us further," confirmed a Tata group official.

Tata Steel spokesperson did not want to comment on the specifics. But bankers said the steel maker was likely to pay a portion of the effective yield on a regular basis, while the rest would be compounded and paid at maturity to the investor.

Due to its structure, the effective yield is likely to be 10.30-10.40 per cent and the fixed portion is expected to be around two per cent.

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Tata Steel has over Rs 40,000 crore capex for expansion in India and overseas. It has earmarked capital expenditure of Rs 9,443 crore (Rs 94.43 billion) for 2012-13.

The bankers said corporates would also use a part of their bond proceeds to repay existing debts, where the interest rate was high.

They said the 10-year bonds would also ease the pressure on cash flows, as the corporates would not have to repay these amount immediately.

"It gives an opportunity for tenure arbitrage, reduces the pressure on cash flows and allows corporates to execute their projects," said a banker.

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CFOs agree. They say they don't expect banks' base rate or minimum lending rate not crashing down in a hurry, so there exists a 150- to 175-basis point arbitrage opportunity in the pricing.

"We require the funds, as our capex cycle is halfway through. The current lending rates for top rated corporates are close to 11.75-12 per cent, higher than the coupon rates of around 10 per cent for 10-year issuances," said a senior finance department executive from a large corporate planning a bond issue.

However, some bankers feel too many issuances may crowd the market and the response may not meet expectation in case of some issues.

"The domestic bond market is not very well developed. There is not enough depth in the market to handle too many issues at the same time. Investors will give some novelty value to Hindalco's issue. But it is unlikely that all the issues will see wide spread over-subscription," said a banker.