Bloomberg News

Tata Bond Risk Falls as Rupee Gains Boost Outlook: India Credit

October 25, 2011

Oct. 25 (Bloomberg) -- The risk of holding debt of Tata Motors Ltd. is slipping the most among global automakers after domestic sales grew and the weaker rupee bolstered the outlook for exports, trading in credit-default swaps show.

The cost of five-year swaps insuring the Mumbai-based company’s bonds against non-payment has fallen 171 basis points in the past month, compared with a 50 basis-point decline for Detroit-based General Motors Co., and a 46 basis-point drop for France’s Renault SA, according to data provider CMA. Local deliveries of cars and other vehicles by India’s biggest truck maker rose 22 percent in September from a year earlier, while Jaguar Land Rover unit sales climbed the most since June 2010.

Tata Motors and Mahindra & Mahindra Ltd., India’s biggest sport-utility vehicle maker, stand to gain from the rupee’s 10.3 percent slide this year, the biggest drop among Asia’s most- traded currencies, as revenue earned in dollars and euros is worth more when converted. Tata’s default swaps had more than doubled in the four months through September on concern Europe’s debt crisis and the Reserve Bank of India’s six interest-rate increases this year will slow demand for cars.

“Both international sales and domestic sales are showing some tremendous growth,” Alex Mathews, the Kochi, southern India-based head of research at Geojit BNP Paribas Financial Services Ltd., said in an interview yesterday. For Tata Motors “the loss caused by higher interest rates will be offset by the rupee’s depreciation,” he said.

Export Growth

The cost of credit protection on Tata Motors has slid 153 basis points, or 1.53 percentage point, to 668 in October, headed for the biggest monthly drop since June 2010, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Default swaps are also used to speculate on bond prices.

Contracts on General Motors debt cost 411 basis points and 510 for Renault, the data show. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. Tata Motors’ bond risk is still among the highest of global automakers, data compiled by Bloomberg show.

Tata Motors sold 4.3 percent more automobiles between April and September from a year earlier as deliveries of commercial vehicles climbed 19 percent, the company said in an Oct. 1 statement. Exports surged 16 percent as demand for Tata’s Ace and 407-brand trucks increased in South Africa, Sri Lanka and Bangladesh. The rupee’s depreciation “will generally benefit” the company because of its offshore revenue, Debasis Ray, a Mumbai-based spokesman, said by e-mail yesterday.

Evoque, Jaguar XF

Foreign-exchange gains contributed 2.5 percent of net income in the year ended March, and 3.3 percent in the prior 12 months, according to the Tata Motors’ earnings statements. The rupee advance for a second day today, gaining 0.3 percent to 49.70 per dollar, according to data compiled by Bloomberg.

Bonds of Tata Motors’s U.K. unit, Jaguar Land Rover Plc, have rallied in October after the company unveiled its Evoque and Jaguar XF models in September. Evoque, a sports-utility vehicle that sells for about $44,000, has a fuel efficiency of 50 miles per gallon, while Jaguar XF runs 52 miles per gallon, according to the company’s website.

The yield on Jaguar’s 8.125 percent notes due in May 2018 has dropped 154 basis points in October, headed for the first monthly decline since the securities started trading in May. The yield on the debt was 9.81 percent yesterday, according to Elara Capital prices.

‘Significantly Better’

“Sales will remain strong, especially with the Range Rover Evoque going on sale,” Juergen Maier, a Vienna-based fund manager at Raiffeisen Capital Management that oversees about $1.2 billion of emerging-market assets, said in an interview yesterday. “Also, with the new XF coming on sale, things look significantly better for Tata Motors.”

The Society of Indian Automobile Manufacturers cut its forecast for car sales growth for the second time this year on Oct. 10, with deliveries to gain as little as 2 percent in the 12 months to March 31, from a July prediction for growth of as much as 12 percent.

The difference in yields between India’s top-rated five- year corporate bonds and similar-maturity government bonds was 91 basis points yesterday, the lowest level this year.

The nation’s benchmark 7.8 percent securities due in April 2021 fell seven basis points to 8.75 percent, according to the central bank’s trading system. Yields have climbed 83 basis points this year as the central bank raised borrowing costs by 200 basis points to curb the fastest wholesale-price inflation among the biggest emerging markets.

Volatile Rupee

India’s bonds due in a decade yielded 663 basis points more than similar-maturity U.S. Treasuries yesterday, narrowing the gap by 13 basis points from a record-high reached on Oct. 3. Rupee-denominated notes lost 1.5 percent this month, the worst performance among 10 Asian debt markets monitored by HSBC Holdings Plc.

Implied volatility on one-month dollar-rupee options was 10.75 percent yesterday, according to data compiled by Bloomberg. The gauge of expected swings in the currency ended Oct. 21 at 11.25 percent, the highest level in two weeks. Traders quote the measure of potential swings in exchange rates as part of option prices.

While the rupee’s depreciation will boost Tata Motors’ earnings, the company will also have to increase the value of its dollar liabilities, spokesman Ray said. Tata Motors has 44.46 billion rupees ($891 million) of debt coming due next year, of which $473 million will be dollar-denominated convertible bonds, according to data compiled by Bloomberg.

‘Notional Loss’

“The rupee’s depreciation will cause a notional loss in the loans of Tata Motors as they mark the debt to its value in the market,” said Basudeb Banerjee, an analyst at Quant Broking Pvt. in Mumbai. “This is, however, only for accounting purposes. What matters is where the rupee is trading when the loans come due.”

Exports by Mumbai-based Mahindra & Mahindra rose 53 percent to 12,956 vehicles between April and September, including Verito sedan exports, according to a company statement on Oct. 1. Overseas sales accounted for almost 6 percent of total deliveries, compared with 4.9 percent in the year-earlier period, the company said.

“Things are looking good for Tata Motors, especially because of the new models they have introduced,” Mahantesh Sabarad, a Mumbai-based analyst at Fortune Equity, said in an interview yesterday. “Tata Motors is a net foreign-currency earner, and the depreciating rupee puts it in a favorable position.”

--Editors: Ven Ram, Sam Nagarajan

To contact the reporter on this story: Siddharth Philip in Mumbai at

To contact the editor responsible for this story: Young-Sam Cho at

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