IL&FS needs a solution like the one Satyam got: Nilesh Shah, Kotak MF
- Debt investors should not worry as things will soon fall in place.
- I am actually positive and have more inflows than outflows.
- It is a growth derating rather than a credit quality concern.
Why is the debt market wobbly at this point of time?
IL&FS was an AAA-rated public finance institution, which enjoyed high trust and reputation amongst retail, high net worth investors and PF trusts. Its rating dived from AAA to D in the fastest possible time. Here, liquidity issues have resulted in delays and defaults rather than solvency issues. It has marque promoters like SBI, LIC, Orix and HDFC amongst others, and an impressive board of directors. With a D rating, there is a crisis of confidence. Apart from IL&FS, we have seen other institutions coming under pressure. Yes Bank CEO was not given extension, in DHFL sale of secondary market yields happened at a higher level than the primary yields, and a combination of these things created an uncertainty for secondary markets.
Secondly, interest rates have been steadily rising. The 10-year benchmark has moved up from 7.5% to 8.10%, and with the expected borrowing programme of the second half to be announced this week, it is expected to further go up. Short-term interest rates are likely to go up with three months to one-year yields moving up by 25-75 basis points. Steadily rising yields have pushed investors to defer their investments in long-dated papers.
The third problem for debt markets is liquidity. You had advance tax inflows, and along with this systematic liquidity is now with deficiency to the extent of ₹1.3 lakh crore. The Supreme Court has announced Compensatory Afforestation Fund Management and Planning Authority (CAMPA) funds should move from banks to the government. That is between ₹50,000 crore to ₹1 lakh crore. Overall liquidity is negative by ₹1.8 lakh crore to ₹2.3 lakh crore. However, we have regulatory action coming back, with RBI, Sebi and Finance Ministry assuring investors of liquidity. If RBI takes appropriate action of providing systematic liquidity, it will soothe the nerves of market and provide stability. Debt investors should not worry as things will soon fall in place.
What is the solution to the problem at IL&FS?
What we need for IL&FS is similar to what we did for the erstwhile Satyam Computers. In the case of Satyam, the owner one day declared the cash in balance sheet does not exist and balance sheet was signed wrongly. Investors were shocked and we were staring at a scenario that one of our top-5 IT companies will not be able to deliver on its contracts to customers and would have an impact on the reputation of IT companies. The government acted fast and created a team of people headed by Deepak Parekh, who stabilised the company and eventually sold it to Tech Mahindra. Shareholders are happy they made money on Tech Mahindra takeover, employees retained their jobs and the industry reputation was not impacted adversely by this event. IL&FS also requires similar kind of deft management, where existing management is supplement with outside supervisory, provided with liquidity so that they can liquidiate their assets in a reasonable manner. Since it is an NBFC, if you keep on repaying and do not get refinance, you will become bankrupt. What is now a liquidity issue will become a solvency issue.
There are fears that debt funds facing redemptions?
I can tell you at our fund house, even today, I have net subscriptions. Our redemptions have been normal and average. Today, I am actually positive and have more inflows than outflows.
NBFC stocks in particular have corrected sharply? What can investors do there?
The equity market has remained high by virtue of a handful of stocks going up. From January till today, while index is up 5%, midcaps and small caps are down 10-20%. The weighted average drop in midcaps and small caps is 27%. People did not notice this drop as Sensex and Nifty were high. Markets have started noticing volatility of currency and interest rates, credit markets and liquidity markets and hence now even those 5-6 stocks have been hit. NBFCs were trading at higher valuations than normal because 17 of 21 PSU banks were not in the lending business anymore due to Prompt Corrective Action. Since these 17 banks were not lending, this space was occupied by NBFCs. NBFCs, in turn, were raising money from mutual funds and other resources. If mutual funds stop lending to the sector, to that extent their ability to lend will come down and their growth will suffer. In NBFC stocks, the correction is more due to derating by virtue of this concern of growth. So, it is a growth derating than a credit quality concern.
Where does India stand in emerging markets?
India has outperformed emerging markets with the Sensex gaining 26% over the past 3 years, while Shanghai has lost 53%. So, if you were long India and short China, you are up 79% in US dollar term. That is a massive outperformance. Investors will think Chinese economy is six times India, while market cap is only twice that of India. Our massive outperformance will provoke investors to take some money out of India. Hence, this is not a market for leveraged positions. Investors should build their portfolios slowly and steadily with a long-term view.