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NCDs gain as interest rate cycle peaks

Prices of newly-listed non-convertible debentures rise 4-11% over the last two-three months

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After a lacklustre performance post-listing, the prices of non-convertible debentures (NCDs) of non-banking finance companies (NBFCs) have rallied sharply on expectations that yields will fall once the central bank starts cutting rates. The prices of these instruments have bounced back by four to 11 per cent in the last couple of months.

A slew of issuances, all from NBFCs, had hit the market during September. However, back then sentiments towards the bond market were weak on account of sticky inflation and expectation of further interest rate hikes. This, coupled with thin volumes in the secondary market had seen prices of these NCDs come off sharply. Now, that the Reserve Bank of India (RBI) has signalled an end to the rate tightening cycle, these issues have seen an uptick in their prices on the back of investor interest.

For instance, Muthoot Finance had launched a Rs 600-crore issue in September with an annual coupon of 12.25 per cent on three-year bonds. The NCD, with a face value of Rs 1,000, saw its price drop to Rs 900 in December, translating into an effective yield of about 16.7 per cent.

The price of this NCD has gained more than 10 per cent from its lows and is trading at Rs 994. Prices and bond yields move in opposite directions. Higher demand for bonds results in higher prices and lower yields.

“Everybody is convinced interest rates are going to come down. This has led to a price rise in these NCDs,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.

“The prices of NCDs are reflective of the overall interest rate environment. As the benchmark government bond yields have come down, these instruments too have seen a rally,” said J Moses Harding, executive vice-president,IndusInd Bank.

The 10-year benchmark government bond yields had shot up from 8.3 per cent in September to almost nine per cent in November.

However, after the central bank said the rate tightening cycle has peaked, yields came down to 8.20 per cent levels in January. Currently, yield for the 10-year government security stands at 8.17 per cent.

Experts believe further gains in NCD prices from current levels are unlikely given bond yields have already factored in expectations of a rate cut. Due to the low volumes in the corporate bond market, prices of these NCDs tend to fluctuate in either direction, they warn. “Volumes are low in the secondary market for such instruments as most investors want to hold on to high yields and there aren't enough sellers,” said Manglunia.

“There are expectations of reversal in the interest cycle. However, most of it has already been discounted in the prices,” added Harding. Muthoot Finance is planning to launch its third NCD issue of Rs 700 crore this year.
 

ON THE RISE
NCD prices have bounced back sharply from their lows as the rate cycle has peaked
  Current 
price (Rs)
Listing
date
Coupon
(%)
Maturity All time
 
low (Rs)
Gain from
 
lows (%)
Religare Finvest 970 27-Sep 2011 12.25 5 yr 930.00 4.3
Muthoot Finance 994 20-Sep 2011 12.25 3 yr 900.00 10.4
Shriram Transport  1,077 18-Jul 2011 11.60 5 yr 1010.01 6.6
Mannappuram Finance 1,001 14-Sep 2011 12.20 2 yr 950.00 5.4
IIFL 971 Aug 24,‘11 11.90 5 yr 875.00 11.0
Source: BSE 

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