Insurers boost bourses

One of the largest investors in the debt market "" the Life Insurance Corporation of India (LIC) "" is moving away from investment in government securities and increasing its exposure to the stock market. LIC is not the only life insurance company to reduce investment in government paper.

According to the Insurance Regulatory and Development (IRDA) data, investment in government paper by the life insurance industry "" known to be long-term investors "" has fallen to 59 per cent of total investible funds in 2003-04 from 65 per cent in 2002-03.

In fact some players like Max New York Life, Kotak Mahindra Old Mutual Life, AMP Sanmar and ING Vysya have even in absolute terms decreased their investment in government paper.

The preference today is for investment in equity and corporate debt, which fetch higher returns.

Investment under these categories has risen sharply from 23 per cent in 2002-03 to 30 per cent of investible funds in fiscal 2004.

As Nick Taket, appointed actuary, HDFC Standard Life, points out, policy-holders are searching for higher yields, which explains towards equity-oriented unit-linked plans.

At the same time with credit-deposit ratios rising, banks too have been selling their investments, to meet the higher credit offtake. With life insurance companies and banks increasingly selling their debt investments, it's no wonder that there is no demand for government paper and yields are ruling at over 7 per cent for the ten-year bond. This could affect the government's borrowing programme next year, with LIC alone seeing 1,000 per cent jump in the sale of unit-linked plans.

This shift has contributed to the soaring stock market, since during the current year, LIC's equity investments have shot up seven times over last year, which is about Rs 3000 to Rs 4000 crore, and the top brass is now scouting for good B group stocks to purchase, having already used up the opportunities in A-group scrips.

Sun Pharma

Sun Pharmaceutical has launched a zero-coupon five-year foreign currency convertible bond (FCCB) for $225 million with a yield to maturity (YTM) of 4.61 per cent per annum.

The proceeds are to be used for funding an overseas acquisition, with analysts speculating that it'll probably be in the American market. The acquisition is logically expected to strengthen Sun Phamaceutical's existing expertise in cardiology, diabetology, psychiatry and neurology.

The company's emphasis on the US market was highlighted earlier this year when it bought three brands from San Diego based Women's First Healthcare for $ 5.4 million and in addition, it has its existing subsidiary Caraco.

The YTM on Sun Pharma's issue is lower than Wockhardt's 5-year zero coupon $100 million issue in September this year, which was at a YTM of 5.25 per cent.

Why has Sun Pharmaceutical been able to raise funds at finer rates overseas ?

The foreign currency convertible bonds are benchmarked against Libor, which has moved from 2.14 per cent (6 months dollar Libor) in September 04 to 2.54 per cent in November 2004.

However, the credit rating of Sun Pharma is AAA for long term debt as against AA for Wockhardt (Crisil Ratings).

Hence the difference in the yields for Sun and Wockhardt is more on account of difference in credit ratings, which is taken into account while determining the premium over LIBOR. The bottomline is that Sun Pharma has been able to line up cheap fnding for its proposed acquisition.

The buzz in banking sector stocks

Bank stocks are back in fashion. The BSE Bankex has outperformed the Sensex by a wide margin this month""""-while the Sensex has risen 6.1 per cent, the rise in the Bankex has been 14.7 per cent.

The last two days' rally in bank stocks, of course, was driven by ICICI Bank's announcement of a hike in interest rates. That's been taken by the market as a signal that the worst is over for Indian banks.

Higher interest rates are good for banks because, while the entire advances portfolio of banks is re-priced, it is only new deposits that get the higher interest rates.

Bank stocks had not participated in the earlier rally in the market, due to fears of the impact of higher bond yields on treasury profits and the depreciation hit that banks would take on their investment portfolio.

Those fears have long been priced in, and the banks that have already shifted their portfolio to the "held to maturity" category are the best placed to benefit from the new-found optimism.

Also, banks that have a large current and savings account deposit base will benefit, since, with call money ruling high, borrowing from the market is more expensive.

The higher interest rates on credit will have an even greater impact since loan volume growth has been very good. The volume effect on revenues will now be complemented by the price effect.

The bonus has been the good news on the regulatory front, with the government announcing measures, such as the ordinance on taking over defaulers' assets and the requirement of a substantial deposit for an appeal against the attachment of assets. The finance minister's emphasis on consolidation is another positive for bank stocks.

With contributions by Freny Patel and Amriteshwar Mathur