As shared from time and time, I am seeing a bright future for Bond market in India. We have picked CARE Ltd and AK Capital services Ltd as they were going to be the major beneficiary of the growth in the bond sector in India. CARE Ltd was advised at 1000 (Click here for earlier study) and AK Capital was advised at 270 (Click here for earlier study). CMP of both are around 1600/- and 415/- respectively. CARE is in Bond rating business while AK Capital is the largest private sector merchant banker in India dealing in the placement of corporate bonds into the market. Ak Capital is having around 8% share of the Non-Bank corporate debt market in India. So at CMP of both, we are already sitting at decent profit. But this is nothing compared to the huge possible scale of growth in Bond sector. This year, as expected Bond sector has grown 20% as compared to credit growth of 5% of banks. Corporates are finding it cheaper to raise funds via bonds than getting the loan from banks. Further high NPA's has limited the risk taking capacity of banks and they are playing safe. But still bond sector is very small as compared to the size of Indian economy. I also feel that in order to play safe, Banks will resort to retail lending especially Housing loan business as i think this is the low hanging fruit which was somewhat ignored by Banks earlier as their focus was on Wholesale loan growth so we may witness some fight over here with banks lowering lending rates to compete with housing finance NBFC's. That's why so far i have tried to pick only those NBFC's which have diversified business model like Sundaram Fin, JM Fin, Edelweiss, TUBE (Cholamandalam), Piramal Enterprises Etc.
75% of the bond market is of Govt securities. Corporate bond market is very small at around 4% of the total debt raised by corporate houses. This figure is at 17% in China and some 14% in USA. These figures of china/USA are coupled with mature equity markets so India with less developed equity markets may need even more participation from Bonds. Even out of this 4%, some 80% bonds are placed privately by Public financial institutions like NHAI which are bought by Fund houses and pension funds.
Public participation is very small in India. Indian Bond market is severely hampered by credibility, efficiency, reliability and liquidity issues which make general public to shy away from it and park their invest-able corpus in bank fixed deposits. But off late, RBI and Government has realized the vulnerability of banking system due to their higher exposure to corporate debt sector. So RBI is taking vital steps in promoting the bond market in India. Bonds are the best option to finance huge funding requirements of Indian Infrastructure. Quite contrary what most people think, banks are not the best option for long term infrastructure funding requirements of the country due to their assets and liability mismatch as their liabilities (Term deposits like FD) are payable on an average after 3-5 years but their long term Infrastructure assets stay alive for around 15-20 years.
RBI has always expressed displeasure at banks not passing the cut in interest rates by RBI to public and corporates. Also after the demonetization, Banks, who are witnessing huge funds inflow, are reducing the interest rates on deposit steadily. So sooner people will realize the high return prospectus in Bond market just like they are investing more in equity markets as their traditional investment options like Gold and Real estate are not yielding any meaningful returns for long time instead these have turned quite risky. In the same way, people who prefer steady returns (like bank FD) will turn to bond market. So i feel that bond market will grow even bigger and should grow at 30% this year.
AK capital's promoters have raised their stake from 62% to 67% in last 2-3 quarters. Also AK Capital Finance, a subsidiary of AK Capital, has raised funds through Bonds issuance of 235 cr offering 9.55% to 9.70% with five to ten year maturities. Its Investors include provident funds, family offices, banks, high net-worth investors and corporates. This shows the trust in AK capital by the market participants.
Although there is not much information about AK Capital in the analyst arena but the group seems credible and I think can turn out to be one of the biggest gainer of the growth of Bond market. I have invested more at 415.
(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)