Posted at 2:03 PM , on May 6, 2020
In August 2019 when Mukesh Ambani had first announced plans to become a zero-net debt company by 2021, most analysts thought it was impossible. After all, Reliance had taken a mountain of debt to finance its telecom and digital foray. There appeared to be no way for RIL to monetize assets in such a short time and become debt-free. But a lot has progressed since then.
Reliance’s debt dilemma
Not many may be aware, but Reliance was a zero-net debt company till 2012. We are referring to net debt and not to gross debt. As of March 2020, RIL has a gross debt of Rs.3.30 trillion and cash reserves of Rs.1.70 trillion leaving the company with net debt of Rs.1.60 trillion. This is the figure that RIL is looking to address by March 2021. But, how did this massive debt mountain come about if RIL was zero-net debt as late as 2012? There have been two factors that drove this debt binge. The first trigger, of course, was the Reliance Jio foray. The company used a mix of refining/petchem profits and long term borrowings in the market. Secondly, RIL also invested heavily in upgrading its refining and petchem capacities. In all, RIL had invested Rs.550,000 crore since 2014 and this was substantially funded by debt. However, now RIL does realize that to sustain valuations in the future, it needs to focus on a more flexible balance sheet. Otherwise, financial risk may become too much for RIL.
Posted at 2:51 PM , on May 5, 2020
The Nifty has rallied nearly 15% in the month of April alone. In fact, if you look at the Nifty from the lows of 23rd March, then the returns on the Nifty are close to 27%. What exactly has driven this rally and can the markets hold this kind of frenetic rally in just over a month.
What triggered the rally
To an extent, the logic for the rally was global because markets across the globe saw a sharp rally in stock markets, including the all-important US markets. Firstly, the market euphoria began with some early success in launching a COVID-19 drug by Gilead of the US. Even as its clinical trials failed, UK based Oxford Research appeared to be moving closer to a cure for COVID-19. Secondly, Indian markets were also enthused by the sharp fall in oil prices. While the overall economic slowdown continued to be an overhang, the Indian economy cannot miss the dividends of cheap oil. Thirdly, there were indications that the virus had peaked out globally although it was far from coming to an end. That led to the confidence that normal business would commence sooner rather than later. Fourthly, short-covering was a major factor in the rally in India. With most of the leading banks and heavyweights oversold, there was a rush to cover short positions in the Indian market. Cues like the Reliance Facebook deal and the RIL rights only underlined the belief that pockets of value may have started emerging in Indian markets.
Posted at 2:18 PM , on May 4, 2020
The troubles for credit risk funds began soon after the IL&FS fiasco. It actually got exacerbated by cases like Essel, DHFL, ADAG, Jet, and Yes Bank. The real last straw was when Templeton opted to wind down six of its funds due to the pressure of redemptions. That posed a real challenge for credit risk funds.
Just a week after Templeton decided to shut down six of its funds, the impact was virtually visible across credit risk funds in India. For example, credit risk funds saw redemptions to the tune of 25% of the overall AUM in just four days since Templeton announced its decision to wind down the funds. The AUM of credit risk funds fell from around Rs.48,000 crore to Rs.36,000 crore in just four trading days flat. The impact was not just felt on the credit risk funds but also on all the non-gilt funds where the funds had exposure to credit risk. Ironically, many of the funds had taken on huge credit risk in a short duration and medium duration funds. The irony was that the short duration fund invested in structured debt with 7-10 year maturity. That literally defeated the very purpose of a short duration fund. The impact of the Templeton winding down was not only felt on other funds of Templeton but across debt funds of other AMCs too. Clearly large corporate investors and institutions were not too pleased with the risks assumed by these credit rating funds in terms of quality.
Posted at 10:26 AM , on April 10, 2020
For the month of March 2020, FPIs sold Rs.124,000 crore in the Indian markets; in equity and debt combined. This is the largest monthly selling by FPIs since they were first allowed into India in the year 1992. What exactly triggered this aggressive selling by FPIs?
Lockdowns are a time for risk-off
A lockdown is never a great idea. But it can be a lot more troubling for an economy like India which largely gets foreign flows due to its growth promise. The lockdown means multiple things for a country like India. Firstly, it means that the GDP growth will slow down. Secondly, it also means that consumer power will be under stress. Thirdly, it implies that we could be in for a series of consumer loan defaults. That is not a great signal for FPIs to invest in India.
Posted at 2:59 PM , on April 9, 2020
In the last few weeks, sovereign wealth funds (SWF) have been estimated to be selling heavily in Indian equity markets. Why have these SWFs suddenly become significant to the Indian markets? It is a story that is directly linked to the sharp fall in crude oil prices globally.
What exactly is an SWF?
Globally, sovereign funds were an idea that began with major oil-producing and exporting nations. As a measure of long term economic security, these nations created sovereign funds which would prudently invest the monies earned from oil. This was meant to take care of the state welfare expenses in tough times. The world’s largest SWF in Norway manages in excess of $1.2 trillion. Other oil-rich SWFs include the sovereign funds of Abu Dhabi, Saudi Arabia, Qatar, and Kuwait.