Assignment

IAPM

LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT,

NEW DELHI

Submitted to

Submitted By

Dr. Monica Chopra

Saurabh Prabhakar

157/2015

Debt Market in India

Corporates, governments and individuals rely on various sources of funding to meet their capital
requirements. Specifically, corporates use either internal accruals or external sources of capital to
finance their business. Funds are raised from external sources either in the form of equity or debt
or hybrid instruments that combine the features of both debt and equity.
The debt market in India consists of mainly two categories:

The government securities (g-sec markets) comprising central government & state
government securities
Corporate bond market.

(A) Government securities

In order to finance its fiscal deficit, the government floats fixed income instruments and borrows
money by issuing g-sec that are sovereign securities issued by the Reserve Bank of India (RBI)
on behalf of the Government of India.
(B) Corporate bond market
It consists of

Financial institutions (FI) bonds,

Public sector units (PSU) bonds,
Corporate bonds/ debentures.

The Corporate debt market is primarily regulated by three institutions namely the Reserve Bank
of India, the Securities and Exchange Board of India and the IRDA. Corporate bond markets are
further defined as the segment of capital markets in the economy that deals with corporate bonds.
There are three main pillars that make up the corporate bond market ecosystem the institutions,
participants and the instruments.
The study of corporate bond market is essentially the study of these three pillars, their roles,
responsibilities and actions in the corporate bond market. The institutions comprise of the
securities market regulator, the banking regulator, the credit rating agencies, clearing houses,
stock exchanges and the regulations and governance norms prescribed by these institutions.
The participants comprise of the market players investors on the demand side and issuers on
the supply side. Instruments is used to indicate the form and features of securities issued in the
corporate bond market.

Market Segment

The Sovereign
Issuer

Issuers

Central Government
State Government

The Public Issuer

Instruments

GOI dated securities,

Treasury Bills, State
Govt. securities, Index
bonds , ZCD

Govt. Agencies &

Stat. bodies

Govt. guaranteed
bonds/debuntures

PSU

PSU bonds ,
debuntures

Commercial Banks

CD, debentures,
,bonds

Corporates
The private
issuer
Pvt. Sector banks

Bonds, Debuntures,
Commercial Paper
Floating rate Notes
Bonds, Debuntures,
FCds
CPs and CDs

Bonds in Primary and Secondary Market of India

Issue/Securi
ties

Amount raised from

Primary Market

Turnover in
Secondary Market

Amount raised
from Primary
Market

Turnover in
Secondary Market

(Rs.bn)

(Rs.bn)

(US $ bn)

(US $ bn)

2013-14

2014-15

2013-14

2014-15

2013-14

2014-15 2013-14 2014-15

Government

8971

9820

162739

180314

150

161

2715

2949

Corporate
/Non
Government

3133

4424

2232

2877

52

72

37

47

Total

12104

14244

164971

183191

202

233

2752

2996

Source: NSE

In 2014-15, the government and the corporate sector collectively mobilized 14,244
billion (US $ 233 billion) from the primary debt market, an increase of 18 percent as
compared to a decline of 2 percent in the preceding year.

The year also saw decline in the share of government borrowings in the total borrowings.
About 69 percent of the resources were raised by the government (the central and the
state governments), while the balance was mobilized by the corporate sector through
public and private placement issues.

The corporate sector showed an increase of 41 percent in the primary market borrowings.

The turnover in the secondary debt market in 2014-15 aggregated ` 1,83,191 billion
(US $ 2,996 billion), 11 percent higher than that in the previous fiscal year.

Similar to the previous years, government borrowing in the secondary market accounted
for more than 98 percent of the total secondary market borrowing

Comparison of Yield structure for Indian and US market

Source: Bloomberg

X axis represents the different time to maturity and Y axis the yield.
The yield of India is comparatively higher than that of the US simply because the US
treasuries are considered as the safest options for the investor in the conditions of turmoil.
But at the same time, since yield or the return to the investor is high in case of India, the
demand is soaring by the foreign investor to buy the Indian domestic bonds.

The yield is affected by market interest rates.

Current repo rate in India is 6.5%,
While the current American interest rate is 0.25%-0.5%.
This impliesthat Yield curve of both US and India is affected by market interest rates.

Also, the US yield curve is relatively more upward sloping than the yield curve of the India.
Its steepness shows the sign of accelerating economy in the long run, whereas,
The yield curve of India is relatively flat depicting that the investors are heavily buying the
long term bonds in anticipation of the rate cuts in future.

Yield for long term bonds in India is not normal as it does not increase constantly with the
increase in time period.
Instead, it has a lower value during certain years as compared to previous year as seen for
years 7, 10, 13, 14, 18, 19, 26, 28, 29 and 31, in the infographics.
On the contrary, the yields of USA bonds show a consistent increase in their yields with time
for the entire 30 years.
The time to maturity of bonds in India ranges from 3 months to 39 years while in USA they
range from 1 month to 30 years.
It can be seen from the graphs that the percentage increase in yield with time to maturity is
low in Indian bonds compared to their USA counterparts.
For India, The percentage difference of yield is 10.45% for bonds offering time to maturity
between 3 months to 39 years. For USA, this difference in percentage of yield is 793.75% for
bonds offering time to maturity from 1 month to 30 year.
This high spread also proves the fact that the yields are nominal in nature adjusting the
inflation. Since the inflation rate in India is higher than that of US, the spread is high.

Bond Analysis

Source: Bloomberg

Bond Features

Issuer Company - NHPC

Industry- Hydro Power Generation
Bond ID Number- EJ0700454
ISIN- INE848E07112
Corporate Bullet Bond
Coupon- 9.25 %, Annual payment, Issue Price- 100
Bond Issue Date- 03/05/2012
Bond Maturity Date - 03/12/2022
First Coupon Date-03/12/2013
CRISIL rating AAA

 Ratings

1. RATIONALE FOR CRISIL RATINGS

CRISIL has upgraded its rating on the bond issue of NHPC Limited (NHPC) to 'CRISIL
AAA/Stable' from 'CRISIL AA+/Positive'.
For arriving at the rating, CRISIL has combined the financial and business risk profiles of
NHPC and its 51 per cent subsidiary, Narmada Hydroelectric Development Corporation
Ltd, and 74 per cent subsidiary, Loktak Downstream Hydroelectric Power Corporation
Ltd because of the majority equity stake that NHPC holds in these companies. CRISIL
has further undertaken proportional consolidation of NHPC's joint venture, National High
Power Test Laboratory (P) Ltd, given the former's significant shareholding in these
companies.
The rating action follows the application of CRISIL's revised criteria on notching up
ratings. The upgrade reflects reassessment of support from the Government of India
(GoI), given the strategic importance of power sector and the key role NHPC plays in the
sector with capacities of 6507 megawatts (MW), on a consolidated basis. Also, a large
portion of the total power supplied by NHPC is to the north-eastern states and Jammu and
Kashmir, which have been awarded special category status by GoI. Moreover, NHPC's
role is critical in harnessing the hydro power potential in the country; CRISIL, therefore,
believes NHPC will remain strategically important to GoI.

2. Rationale for CARE Ratings AAA -Stable

The rating continues to take into account the majority ownership by the Government of
India (GoI) in NHPC Limited (NHPC), the companys established position as Indias
largest hydro power producer with geographical diversity of sales and healthy operational
efficiency of its power stations. Furthermore, the ratings favorably consider NHPCs
comfortable capital structure and comfortable liquidity position backed by healthy cash

and bank balance, its consistent financial performance and strong earnings protection
attributable to long-term power selling arrangements with regulated return on equity. The
ratings also take cognizance of the risks associated with implementation of the ongoing
projects and the weak credit profile of the companys power off-takers. Going forward,
completion of the ongoing capex plans within the time and cost estimates while
maintaining its capital structure and timely collection from its off-takers shall be the key
rating sensitivities.
3. Rationale for Fitch Ratings -BBB Stable
Largest Hydropower Player: NHPC's ratings benefit from its position as the largest
hydropower producer in India with about 15% of the country's hydropower capacity. It
has around 40 years of experience in constructing and operating hydropower projects. Its
portfolio is diversified with 20 operational projects across seven states, with no plant
accounting
for
more
than
20%
of
its
total
capacity.
Stable Cash Flows: NHPC does not have any offtake risks as it has long-term power
purchase agreements for all of its power plants. The group benefits from a favourable
regulatory regime within which it is able to pass through to its customers all of its costs operational, financial and depreciation. A 15.5%-16.5% return on regulatory equity is
built into its tariff structure, along with incentives on exceeding the normative availability
factor. The current tariff formula covers five years from April 2014 to March 2019.
4. Rationale for ICRA Ratings- AAA Stable
ICRAs AAA rating reflects NHPCs established position in the hydro power generation
industry in India, its significant size of operating projects and strategic importance to the
GoI which is also reflected in the consistent support from GoI in terms of low cost
subordinated debt for some of its projects. ICRA also notes the competitive tariffs of its
plants with an average tariff of Rs 3.53/kwh during FY 2014-15 (adjusted for previous
years income) and strong operating efficiencies, as reflected by average plant availability
factor (PAF) of 77.3% during FY 2014-15. Further with the commissioning of four
delayed ongoing projects during FY2013-14, i.e TLDP-III, Nimoo Bazgo, Uri-II and
three units of Parbati-III with total capacity amounting to ~807 MW and fourth unit of
Parbati III (130 MW) in May 2014, there is significant visibility on increase in revenue
and profit streams

Bond Description

Company Overview
NHPC Limited is an India-based company, engaged in generation of hydroelectric power. The
Companys other operations include contracts, project management and consultancy works. The
Company has 18 Power Stations, 4 construction projects in 7 states across the country and has an
installation base of 6507 megawatts from 21 hydropower stations. It provides consultancy
services in various fields of hydro power include River basin studies; survey works; design and
engineering; geotechnical studies; hydraulic transient studies; hydrological studies; construction
management; testing; commissioning, and operation and maintenance. It is providing Design &
Engineering Consultancy services to Mangdechhu Hydroelectric Project Authority (MHPA) for
the implementation of 720 megawatts Mangdechhu Hydroelectric Project in Bhutan. It is also
engaged to provide Management Consultancy to Ethiopia Electric Power Company (EEPCO)
through a Consortium led by Power Grid and BSES Rajdhani.

Debt Analysis

Total debt raised by -INR 191,623(MM)

Debt raised by issuing bonds -INR 109,693(MM)
Through loans INR 81,930(MM).
Weighted average maturity of bond is in 8.23years
Weighted average Fixed Rate Coupon is 8.69%.

YIELD AND SPREAD ANALYSIS

YAS selects a benchmark bond from yield curve whose OAS duration most closely matches to
selected security. The Spread for the given bond i.e. 42.02 basis point therefore we can say that
the liquidity is high.

The True Yield or YTM or effective yield of bond is 7.55%.

The current yield of a bond is calculated by dividing the annual coupon payment by
the current market value of the bond
The current yield 8.621 %.
As current yield is higher than YTM bond is trading at a price greater then par value.
The risk section of YAS measures the risk, duration and convexity of the bond. It uses
default benchmark treasury issue as its hedge security.
The risk, modified duration and convexity is based on workout date OAS and hedge bond
OAS.

The modified duration is 4.280 so the risk of bond is low.

The value of convexity for the bond is .231.
The risk of bond indicates price sensitivity given shifts in interest rate.
Risk of the bond is 4.780

Spreads:Option Adjusted Spread is basically taking into account an embedded option scenario and then
calculating different components shows that there is no considerable difference in both the
scenarios that is with and without the option.

OAS of the bond is 35.5 basis points which is lesser than normal spread (62.65) which
means option would help in increasing liquidity of the bond.

Forward Price Analysis

The FPA or Forward Price Analysis function use in order to analyze the purchase price
with borrowed funds through forward pricing.
Repo Rate is rate at which you can borrow selected security. Repo rate here is 6.5%.
Forward price is the price of bond for future settlement given the repo rate and Coupon
Income. The Forward price given is 107.292546
The price drop is difference between settlement and forward price.
Yield drop is 13.831(bp)
Yield drop and Price drops are important to dealers who need to price bond for future
settlement because the quoted price must be adjusted to account for cost of carry impact
on trade.

Z-SCORE ANALYSIS

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:
A = working capital / total assets
B = retained earnings / total assets
C = earnings before interest and tax / total assets
D = market value of equity / total liabilities
E = sales / total assets

Investors can use Altman Z-scores to determine whether they should buy or sell a
particular stock if they're concerned about the underlying company's financial strength

Investors may consider purchasing a stock if its Altman Z-Score value is closer to 3 and
selling or shorting a stock if the value is closer to 1.8.

Income statement

Net sales
8,353.82
Operating income (income before interest and
2,609.87
taxes -- EBIT)

Balance sheet

Current assets
Non Current Assets
Total assets
Current liabilities
Non Current Liabilities
Total liabilities
Retained earnings

9,859.25
45,306.91
55,166.16
5,536.34
20,875.77
26,412.11
2,319.21

Market value of equity

26,735.66

Market value

Total no. of shares(in cr.)

Market Price

PAT
Dividend

CALCULATION
Amount
0.047309256
0.151430152
1.01225023
0.078361626
0.042040447

EBIT / Total assets

Net sales / Total assets
Market value of equity / Total liabilities
Working capital / Total assets
Retained earnings / Total assets

Factor
3.3
0.999
0.6
1.2
1.4

Result
0.16
0.15
0.61
0.09
0.06

RESULTS AND INTERPRETATION

Results
Interpretation

Z-Score

1.07

As the Z-Score is below 1.8 therefore the likelihood of bankruptcy is high

Investors may consider selling or shorting a stock if the value is less than 1.8.

1107.06685
24.15

2,440.14
120.93

Interpretation
NTPC Ltd has Z score of 1.07 which implies that the likelihood of bankruptcy is
very highss
Investors may consider selling or shorting a stock since the value is less than 1.8.
But it has the support of Indian Government due to which it will continue to be of
strategic importance to India's power sector
Because NHPC has a huge role in harnessing the hydro power potential in the
country

Future Outlook
At present, the credit rating of the bond by CRISIL ICRA and CARE is AAA, hence it is a high
grade bond and have a very low credit risk but the outlook may be revised to 'Negative' in case
of diminution in support from GoI or any further undue delay or cost overrun in commissioning
of ongoing projects
The company will continue to be of strategic importance to India's power sector, given NHPC's
role in harnessing the hydro power potential in the country.

References

www.crisil.com
https://www.nseindia.com
https://www.indiaratings.co.in
www.icra.in
www.careratings.com
in.reuters.com
Bloomberg Terminal LBSIM