Bonds, Currencies & Commodities
Bond market in a quandary

Yields on government bonds have witnessed wide fluctuations as participants speculated on the impending rate hike—but the government still remains non-committal on the timing of this move

Over the past few days, yields on the benchmark 10-year bonds have seen volatile movements, as traders speculate on the awaited monetary actions by the government. Although the Centre has given strong signals for a withdrawal from its supportive stance on interest rates, it is not clear when and how the government will put its plans into motion.

 The yield on the 6.35% note due January 2020 fell two basis points to 7.55% yesterday after Planning Commission deputy chairman Montek Singh Ahluwalia dismissed rumours of the Reserve Bank of India (RBI) raising interest rates before the January monetary policy review. Earlier, the 10-year bond yields were pushed to their highest level in about 14 months, amid speculation that rising inflation would prompt the central bank into hiking interest rates.

Indeed, the government has been sending mixed signals from time to time, with no clear indications of the timing and extent of rate hike. It has been putting off the upward revision in interest rates in the light of continued sluggishness in credit growth. Bank credit grew by just 10.5% in November, which may force the RBI to further bring down its credit growth target from 18%. At the same time, the rapidly accelerating food and wholesale price inflation is keeping the central bank on its toes.

This has also put bond markets in a spot of bother. RVS Sridhar, treasury head of Axis Bank confirms, “Currently, the bond market is worried about the rate hike. It is not sure what would be the extent of action, though it knows that RBI would tighten rates soon. At some stage, in the matter of the next few quarters, markets are pricing in the hike in reverse repo rate.”

The RBI is widely expected to implement a hike in the cash reserve ratio (CRR), the percentage of excess reserves banks should keep with the RBI, sometime around January. Mr Sridhar also believes that there is a high probability of CRR hike from next month. “It could be announced even before the policy. Hike in the reverse repo rate, to my mind, is unlikely before June 2010.”

Mr Sridhar opines that the 10-year yields will move in a band of 7.50%-7.75% until March 2010. He expects rates to remain around 7.75% around June.
 

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Hanung Toys wins significant order from US

Hanung Toys has won an order worth Rs280 crore from the US. This indicates the strength of the American economic recovery

Hanung Toys & Textiles Ltd, India’s largest manufacturer and exporter of soft toys, decorative cushions and children’s room furnishings has said that it has signed an export order tie-up with a leading US buyer, for exporting home furnishing. The deal is valued at $60 million (about Rs280 crore) which is to be completed by December 2012.

The size of the deal underlines the fact that order flows from the US have started in full swing. It is a significant pointer for companies exporting garments (Nahar Spinning & RSWM) and furnishing (Welspun & Himatsingka Siede). We expect a series of order flows in the coming year which is starting on a bullish note. For the September 2009 quarter, Hanung posted an operating profit of Rs31.48 crore and sales of Rs182.61 crore, higher than the sales of Rs168.29 crore and an operating profit of Rs27.65 crore in the year-ago period. Its operating profit margin has averaged 16% over the past three quarters. The current valuation of textiles and other export companies is depressed because the US economy is seen to be in a weak recovery mode. Hanung’s market cap is 0.38 times its sales and 2.22 times its operating profit of the September quarter. This latest US order deal has helped the stock regain its momentum which it lost since October 2009 after hitting a high of Rs132. On Thursday, the stock shot up 5%, ending the day at Rs116.
 

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Jet Airways gets government nod to raise $400 million through QIP

Jet Airways was eagerly waiting for the government's clearance to raise $400 million through the QIP route from foreign institutional investors to meet its cash flow requirements

Jet Airways, the Naresh Goyal promoted airline, has finally got clearance from the Indian government to raise $400 million through qualified institutional placements (QIPs).

The Cabinet Committee on Economic Affairs (CCEA) approved the Jet Airways' proposal, as recommended by the Foreign Investment Promotion Board (FIPB), to raise $400 million via equity investment through the qualified institutional placement (QIP) route from foreign institutional investors, an official statement said.

The airline had planned to raise funds from foreign institutional investors (FIIs) as the appetite for domestic investment in the aviation sector in India is not strong. Jet Airways has a consolidated gross debt of $3.10 billion, including $2.20 billion of aircraft debt. Its current payment obligations amount to about $330 million that include repayment of debt, payment to creditors and pending obligation to SICCI towards JetLite. After buying Sahara Airlines from the Sahara group, Jet Airways renamed it as JetLite.

Jet Airways, which holds the largest market share of 25.3% in the domestic aviation space, saw a 33% increase in passenger traffic during November, as compared with the industry average of 29%.

Earlier this month, speaking at the US-India Aviation Partnership Summit, Mr Goyal had said that consolidation among Indian airlines is inevitable and will be necessary to restore financial sanity to the market. He said the Indian aviation market suffers from high costs, a substantial volume of overcapacity and lack of adequate infrastructure at domestic airports.

For the quarter to end-September, Jet Airways reported a net loss of Rs4.10 billion from Rs3.80 billion as its revenues fell 27% to Rs23.80 billion from Rs32.60 billion, for the same period last year. The carrier has had to suffer a loss of Rs800 million due to a five-day pilot's strike in September that resulted in close to 1,300 domestic flights and around 200 international flights being cancelled.

"Domestic air traffic appears to have started reviving in the past few months based on recent traffic data. This, along with the peak season impact in the third quarter, will help airlines to improve yields, which otherwise had been severely impacted due to the recession and lean season impact in the second quarter," Jet Airways said in a release.

The company is planning to cut costs across its operations to improve its revenues. "We expect unit costs to be down by 10% year-on-year across all fields excluding fuel," the official added.

Jet Airways said that during the quarter, fuel prices increased by 17.4% as compared to the April to June quarter and this led to an additional cost impact of Rs1.10 billion.

IDFC-SSKI Securities Ltd in a report said, "With the macro-environment turning optimistic and the cost curve of the industry at its bare bones, we expect the cash losses of Jet to get limited, marking the beginning of a turnaround. However, with consolidated debt at $3.10 billion and payment obligations at around $330 million, capitalisation concerns continue to dominate. Jet's ability to raise funds through a QIP, sale and lease back of assets and sale of its land bank remain a critical monitorable going ahead."

During the quarter, Jet Airways reported revenues of about $35.50 million from its lease business. However, six out of its total nine aircraft currently on lease with various operators in the Gulf are expected to come off from September onwards. As per media reports, Jet was in discussions with Oman Air and Etihad to lease out two of its Boeing 777 wide-body airplanes.

Earlier, speaking with Moneylife, Saroj K Datta, executive director, Jet Airways, had said that the company was looking at expenses involved in each comparable item, specifically for Jet Konnect.

For example, the enhanced vision systems (EVS) costs are irrelevant and it would consider cost cutting in fuel consumption, engineering costs and such other fields.

Jet Konnect, which operates 130 flights daily, is the carrier's no-frills all-economy class service in key domestic routes and is designed to meet the needs of the low fare segment.
 

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