The bond market is showing confidence in Cyrus P Mistry’s ability to maintain growth and rein in debt at India’s biggest business group when he takes over as the Tata Group’s chairman next week.
Contracts insuring Tata Motors Ltd’s debt against non- payment slid 28 basis points since November 30 to a nine-month low of 373, according to data provider CMA. Tata Steel Ltd’s 2014 convertible bonds rose 1.9 per cent, lowering the yield 101 basis points to 3.49 per cent, Elara Capital Plc prices show. Ratan Tata, who led the takeovers of Jaguar Land Rover, Corus Plc and Tetley Group Plc, will retire on December 28.
The 32 listed Tata firms will be able to scale back costs of almost $35 billion in combined debt, as BNP Paribas SA and Goldman Sachs Group Inc predict the Reserve Bank of India (RBI) will cut Asia’s highest interest rates next month. They will also benefit from a rebound in global consumption, as policymakers from the US, Europe, Japan and China pump cash into their economies.
“We aren’t concerned at all about the group’s prospects and repayment ability,” Hemant Dharnidharka, Bangalore-based head of credit research at SJS Markets Ltd, said in an interview. “If it has payouts of $12 billion in the next three years, then it also has consolidated revenues of over $100 billion. The new chairman is the single largest shareholder. He is as invested and interested in it as anybody else.”
Largest shareholder
Mistry’s father, Pallonji Shapoorji Mistry, ranks 90th among the world’s richest men, with an estimated wealth of $11.3 billion, data compiled by Bloomberg show. He, along with sons Shapoor and Cyrus Mistry, owns 18 per cent in Tata Sons Ltd, the largest single stake in the conglomerate’s holding company.
Tata Sons needs to redeem a total $2.83 billion in bonds and loans in the next three years, according to data compiled by Bloomberg. Tata Steel, India’s largest producer of the alloy, must repay $4.69 billion and Tata Motors faces payments of $2.09 billion. Tata Power Co and Tata Communications have $1 billion each coming due.
The group needs to lower its debt to a “more manageable level,” outgoing Chairman Tata said in an interview with Financial Times published on the newspaper’s website on December 6. Tata Sons has nothing to add to the chairman’s recent comments on the need to reduce liabilities, Mumbai-based spokesman Debasis Ray said in an e-mail on December 13.
The holding firm had cash and equivalents of Rs 1,960 crore ($359 million) as of March 2011, data compiled by Bloomberg show. A similar gauge was at Rs 23,700 crore for Tata Motors on September 30 and Rs 9,590 crore for Tata Steel.
Jaguar turnaround
The yield on the 8.125 per cent pound-denominated bonds due 2018 of Tata Motors fell 17 basis points, or 0.17 percentage point, this month to 5.82 per cent, as the automaker reported retail sales of its Jaguar Land Rover unit climbed to a record in November, helped by demand in China. That’s the lowest level since the notes were issued in May 2011.
The extra amount investors seek on the securities over comparable government debt tumbled 562 basis points this year to 3.43 percent. Retail deliveries at the luxury carmaker rose 14 percent last month, as sales of Land Rover vehicles surged 43 percent in China, the automaker said in a statement on Dec. 12.
“Tata Motors’ JLR operations have turned around and can comfortably repay debt,” Rajeev Radhakrishnan, head of fixed income in Mumbai at SBI Funds Management Pvt., a unit of India’s largest lender that holds the 2015 bonds of Tata Sons, said in an interview on Dec. 17. For Tata Sons, investor “comfort comes from their ownership of all the Tata companies. Diversified operations are their biggest strength.”
Improving outlook
The world economy will expand 3.6 percent in 2013, faster than an estimated 3.3 percent this year, according to forecasts from the International Monetary Fund published in October. India’s growth will rebound to 6.7 percent in the year through March 2014 from an estimated 5.5 percent in the current fiscal year, according to Goldman.
Tata Motors introduced the Nano in 2009, the world’s cheapest car with prices starting from near $2,500, as an upgrade option for millions of Indian motorcycle owners.
‘Difficult market’
Tata Steel posted an unexpected loss in the three months ended Sept. 30 as prices fell amid economic slowdowns in Europe and China. The average cost of the global benchmark hot-rolled coil that the company produces fell 19 percent in the quarter.
The steelmaker plans to restructure its U.K. business, cutting 900 jobs and closing 12 sites, it said in a statement on Nov. 23. The cuts will include the loss of 580 jobs and the closing of its Tafarnaubach and Cross Keys plants in South Wales, according to the statement. ArcelorMittal, the world’s biggest producer, reported the lowest quarterly profit in almost three years in October and is moving output to cheaper sites and idling plants.
“Tata Steel operates in a difficult global steel market with a weak economy, excess capacity and lower demand,” Koen Vanderauwera, a bond-fund manager at KBC Asset Management SA in Luxembourg who holds the debt of the steelmaker and Tata Power, said in an interview on Dec. 17. Tata Steel’s debt “will weigh on my mind. I look at the payout in 2015 and I say wow.”
‘Get Wary’
International investors are more wary about buying Indian corporate debt after firms including Suzlon Energy Ltd. and Sterling Biotech Ltd. defaulted on convertible bond repayments this year, according to Daniel Gonzenbach, a portfolio manager at Zurich-based Holinger Asset Management AG.
“Indian companies are in focus right now for reasons that are a combination of concerns regarding corporate governance and debt,” Gonzenbach, who holds Tata Steel bonds, said in an interview on Dec. 17. “People who would like to be invested and involved get wary.”
Tata Steel is planning to raise loans of about 260 billion rupees to fund its first new plant in a century, two people with direct knowledge of the deal said in August, asking not to be identified as the information is private.
“The current yield on Tata Steel’s bonds already incorporates” the slower sales in Europe, said SJS’s Dharnidharka. The company’s European operations are a “small part of the entire picture” for Tata Group, he said.
The yield on Tata Steel’s 10.2 percent rupee-denominated debt due 2015 fell to 9.32 percent this month from this year’s peak of 10.30 percent in May, prices from the Fixed Income Money Market and Derivatives Association of India show.
Rupee Yields
India’s 10-year government bond yields slid 42 basis points this year as the central bank added more than 2.7 trillion rupees to the banking system by lowering reserve requirements for lenders and buying debt at open-market auctions. A similar measure in China rose 15 basis points to 3.59 percent.
The yield on the 8.15 percent government debt due June 2022 fell one basis point to 8.15 percent in Mumbai on Thursday, offering an extra 637 basis points over Treasuries, while the rupee lost 0.6 percent to 54.875 per dollar.
Dollar bond risk for Indian companies fell this year. The average cost of five-year credit-default swaps insuring against non-payment by seven local issuers dropped 215 basis points to 246, according to data provider CMA, which is owned by McGraw- Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.
“Mistry has been known to succeed Ratan Tata for a year,” said SBI Funds’ Radhakrishnan. “He has worked alongside the incumbent in the meantime and so the transition has been very smooth. Expectations are always a big issue in leadership transitions. There’s an upswing in their global automobile business and a downswing in their steel units. We’ll have to see how the overseas operations stabilise.”
