In This Issue:
- Editor’s Column – Private Lenders are Seeing Credit Rating Upgrades
- UTI Credit Risk Fund – Portfolio Analysis
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Editor’s Column – Lenders are Getting Credit Rating Upgrade
From 15th May to 30th August, a total of 55 bond issuers received credit rating upgrades out of which 36 issuers were from the financial sector. The rating upgrades clearly suggest that private lenders balance-sheets are improving and they are eating market share of government banks.
Microfinance companies are expected to turnaround going forward, as asset quality headwinds faced by the microfinance companies due to demonetization seems to have passed. NBFCs and HFCs are also expected to deliver stable performance. NBFCs have grown steadily in the last few years and they are expected to gain market share going forward. The expansion would be supported by NBFCs’ ability to customize products, price risk and manage credit costs, especially costs related to small-ticket loans, light commercial vehicles (CV), used CV, small-ticket housing loans and loan against property. However, competition is likely to intensify in certain segments such as large-ticket housing, new heavy CV and large-ticket loans against property.
As per RBI data, In FY-18, loans and advances of the NBFC sector increased by 21.2% and investments increased by 13.4%. Balance sheets of nonbanking financial companies (NBFCs) grew on the back of credit expansion, primarily by loan companies, asset finance companies, and investment companies. NBFCs consolidated balance sheet expanded with strong credit growth that was financed through higher borrowings. As per RBI data, bank credit growth was 6.2 % during the H1FY18 while NBFCs’ credit growth was 14.9% against 7.9% in H1FY16. This was driven by strong growth in credit to retail and services sectors. Given that NBFC’s NPA levels are lower than other lenders, retail-focused NBFCs are expected to do well.
HFC industry also remains healthy with affordable housing emerging as a new growth driver. The government of India is focusing on affordable housing schemes. Housing Finance sector has aggressive competition as the market has two categories of players, Housing Finance Companies will eat the market share of PSU Banks as PSU Banks are still cleaning their balance sheets. Loan Book growth is expected to expand at 18- 20% CAGR from Rs. 14.3 trillion (FY17) to Rs. 33.5 trillion (FY22). High government support and increasing demand/ penetration in Tier II smaller towns will fuel loan growth over the period. Disbursements are expected to grow at 18 – 20% CAGR over FY 17 – FY 22 on the back of higher finance penetration, demand for affordable housing and increasing urbanization. Mortgage penetration at 10% in India is 9 – 11 years behind other regional emerging markets like China and Thailand.
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UTI Credit Risk Fund – Portfolio Analysis
UTI credit risk fund portfolio is diversified through 17 sectors but majority of fund holding is in the financial sector. Finance sector has 42% weight in total portfolio (Financial sector includes Banks, Microfinance, HFCs ). Fund holds 27 papers from the financial sector, majority of papers are from the NBFC companies or private banks, which is positive as most of the PSU banks are under PCA, and all PSU banks are still struggling with NPAs. Private lenders are witnessing rating upgrades and will improve the credit quality of the portfolio.
Apart from the financial sector, metal has second highest weight followed by power and telecom sector. Metal has 8.99% weight, Power has 7.1% and Telecom has 5.82% weight in the portfolio.
In the metal sector, fund holds Vedanta, BALCO and Amba river coke NCDs. The outlook for the metal sector remains bleak as global growth can derail due to trade spat between the U.S. and China, which can affect commodity prices. As the trade war between the two countries becomes severe, China can experience an economic slowdown, because the U.S. is one of the largest markets for Chinese products, and the newly implemented tariffs would lead to lower sales and employment in China. As a result, the consumption in the country will go down, causing the demand for the various commodity to decline as well.
In the power sector, fund holds transmission companies, renewable energy, and generation companies NCDs. The power sector is in stressed position but transmission sector is doing better when compared with generation and distribution. UTI credit risk fund holds 2.78% in Talwandi Sabo Power (AA) and Reliance utilities (AAA) which is in power generation, all other power investments are in the transmission sector or renewable energy sector. Click here to Read Outlook on Transmission & Renewable Sector
In the telecom sector, fund holds Vodafone & Idea NCDs. The outlook for the telecom sector also remains weak due to the pricing power and intense competition in the telecom sector. Even if tariffs remain the same, market share gains by Reliance Jio can erode profitability further for Vodafone and Idea.
UTI credit risk fund portfolio has 72% of bonds with higer credit ratings (AA and above) while 28% of bonds are lower rated. Fund holds 21% in AA- rated instruments and 7% in A+ rated instruments.
UTI credit risk fund holds 0.28% in Jana Small Finance bond, whose credit rating was downgraded recently, while it holds 0.28% in Shriram City Union Finance bond, and 0.19% in Au Small Finance bond whose credit rating was upgraded recently.
Expese Ratio- 0.63% (direct plan), 1.67% (regular plan).
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