This Presentation is from Panel discussion on Property v Luxury assets - what should and what will indians invest in? session at the Global Wealth Management Conclave 2014 organised by India Inc - http://www.indiaincorporated.com- on April 7, 2014

1. Property v Luxury Assets –
What should and what will Indians invest in?
In association withOrganised by
www.indiaincorporated.com @indiaincorp
7th April, 2014

2. Indian Bond Market
Liberalisation Will Open Doors

3. Indian Bond Market: Exec Summary
 For risk averse investors, bonds are the perfect instrument. However, despite the
generally good quality of issuers and a growing economy, the market remains
fledgling in size and offers minimal opportunities for foreign investors;
 Liberalisation of access together with funding requirements for a growing economy
will drive market expansion and allow better access to foreign funds;
 Investors have a choice of Eurobonds (including Convertible Bonds), Domestic
Bonds and Managed Bond Funds (JPM India Active Bond Fund) to access the India
story;
 Investors beware macro risk and corporate governance pitfalls.

4. Gentlemen Prefer Bonds….
Bond Equity
Capital Repayment Y N
Current Income Y Not Guaranteed
Seniority Y N
For risk averse investors, bonds are the preferable
route to the India growth story

5. Size Matters – Market Depth Shallow
“Despite solid
aggregate
demand and a
rising consumer
base, the depth of
Indian markets
lags the mature
markets and even
China. It
languishes at the
lower end of
Asian emerging
markets.”
(ASIFMA)

6. Size Matters – Indian Bond Market Small
The nascent
state of the
Indian bond
market will have
an impact on
liquidity and
availability of
opportunities
US Bond Market
USD 35 Trillion
Indian Bond Market
USD 200 Billion

7. Domestic Debt Market Profile - Size
Outstanding Bonds Listed Corporate Bonds (>1 year Maturity)
Note: data Converted at US$ 1 = INR 63.75
Source: NSE/ RBI data

8. Domestic Debt Market Profile - Quality
Local ratings
are robust with
very few rating
downgrades

9. New Issuance: Indian Interest Rate Outlook
The price of
growth….
….long term, high
domestic cost of
funding will
encourage potential
issuers to tap
overseas investors
Source: XXX
Source: Bloomberg

10. Indian Corporate Bond Market - Investors
Principal investors in corporate bond market
• Banks
• Insurance companies
• Provident Funds
• Mutual Funds
• FII’s
• Retail investors
Investments can be divided into following buckets broadly
• 0-3 years – Mutual funds and FIIs are most active
• 3-5 years – Mainly Banks along with Mutual funds and insurance
• > 5 years – Usually Insurance companies and Provident funds
Source : RMF Research
FII’s and NRIs
remain marginal
players due to
market
restrictions….
Source: Reliance AM

11. Liberalisation is the Key…
 “India should introduce wholesale liberalisation of rules restricting foreign investors
from participating in the domestic bond markets” FT, Sept 2013
 Foreigners are restricted to holding an aggregate total of USD 30bn in government
debt and are also restricted in how much corporate debt they can hold;
 The SEBI has published a paper condemning the current restrictions as too
complicated and a hindrance to implementing economic policy;
 Opening up the market will enable India to tap foreign money much needed to fuel
growth. For investors, it will create a larger and more liquid market;
 Including Indian bonds in global bond indices would also attract investment from
foreign pension funds and insurance companies

12. The Experience with Foreign
Currency Convertible Bonds

13. What is a Convertible Bond?
 A convertible bond allows the holder to convert the debt instrument into underlying
shares at a pre-set conversion (or strike) price;
 In practice most convertible bonds can be converted into equity at any time during the
securities life ;
 A convertible bond is a bond with an embedded equity option. Valuing convertible
bonds involves valuing the bond portion and the equity option;
 Convertible bonds combine the best features of both debt and equity, which has
advantages for both issuers and investors;
 Standard maturities are five, seven or ten years, Some companies retain the option
to force conversion subject to stock performance triggers. Many convertibles have
reset clauses in the event of any M&A activity, stock splits, super-dividends etc.

14. FCCB Issuance: The Story Thus Far….
Peaking equity
markets and low
volatility make
FCCB issuance
difficult
Global banking crisis
Source: KNG Data
Very little issuance
post 2010 due to
various reasons –
the negative
experience with mid
cap issues a large
factor

15. Peaking Equity Markets….
Investors not keen
to pay premium over
an equity market at
all time high…..
…on the flip side,
corporates would
love to issue at
these levels…
….it’s just a
question of
matching pricing
expectations
Source: Bloomberg
In the credit crisis of
2008, many issues were
available at bargain
basement prices as
market liquidity dried up

16. Drivers of New FCCB Issuance in India
• Investors are very keen to see new, quality issues (with friendly pricing). As the Indian growth
story continues unabated, we expect Indian corporates to tap the FCCB market for their funding
requirements. We believe, the market will be limited to blue chips given the overall negative
experience with mid-caps;
• High (and rising) interest rates in India relative to international markets will encourage Indian
corporates to search outside the domestic market for funding;
• Refinancing of outstanding issues approaching maturity, where the underlying stock has not
performed well enough for issuers to avoid repayment;
• The monetisation of Government holdings in PSU’s eg REC
• Market instability: Inherent structural weakness in the domestic equity market (ie significant levels
of support from FII’s) could lead to instability in the medium term as pressure on global bank
liquidity/ global growth concerns continue. This, together with regional socio-political risk factors
may lead to increased equity volatility;

17. A Word of Caution…

18. Watch Your Step…
 Macro economic risk: The Indian governments failure to deliver on reforms,
infrastructure build out and job creation has lead to a stalling of growth rates on more
than one occasion. The fallout from this? Rising inflation and a cratering currency;
 Illiquidity: The size of the market means that Indian paper doesn’t exactly trade like
water. When markets get dislocated (a la 2008), getting out of bonds in a falling
market can be painful;
 Corporate Governance/ Promoter Concerns: The white elephant ever present in the
room. Until India deals with problems of corruption and corporate malfeasance, India
will never function efficiently as an economy;
 Market Access: remains highly restricted. Liberalisation is key;
 Taxation: seek tax advice before investing

19. Beware Macro Economic Risk
The Indian
Sovereign yield
curve indicates that
while long term
growth remains
healthy, the medium
term road looks
bumpy….
Source: Bloomberg

20. Currency Weakness Can Wipe You Out
Indian Banks were offering
12%+ rates on INR Bonds and
Deposits. GBP Investors would
have suffered 30%+ currency
loss against
…the stalling of the
economy last year
sent the GBP/INR
rate to all time
highs. Any yield on
rupee investments
was completely
oblerated
Source: Bloomberg

21. Indian Bond Returns Profile

22. Indian Yields High Compared to Asia
Source: Bloomberg
India Sovereign
Yields remain at the
top end of the
spectrum –
illiquidity premium

23. Indian Government Bonds Offer Yield
Source: Bloomberg

24. Example Eurobond Issues
Eurobond issuance
is dominated by the
banks sector Issuer Name Coupon Maturity YTM
State Bank of India 4.50% 2015 1.75%
Rural Elec Corp 4.25% 2016 2.55%
ONGC 3.75% 2023 5.15%
Source: KNG Data

25. Example Domestic Issues (INR)
Non-agency bonds
tend to yield 10-11%
across the board Issuer Name Coupon Maturity YTM
State Bank of India 7.45% 2015 9.25%
Rural Elec Corp 9.38% 2016 9.50%
ONGC 8.40% 2014 9.40%
Source: KNG Date

26. Returns on Indian Bond Funds
Year Absolute Annual Return
2014 -
2013 4.5%
2012 3.3%
2009 -11.0%
2008 12.8%
JPM India Active
Bond Fund
Source: Moneycontrol

27. Disclaimer
This report is intended only for the information of the addressee. Any use, copying, distribution or
disclosure by anyone other than the intended recipient is strictly prohibited. It is not an offer,
recommendation, solicitation or official confirmation of terms for any transaction. The contents
have been prepared from generally available information and KNG Securities LLP does not
guarantee the accuracy or completeness of the information herein. KNG Securities LLP is
authorised and regulated by the FSA.

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