Brief India: Embassy Office Parks REIT IPO – FY19 Revised Down, Yield Propped up by Zero Coupon Bond and more

In this briefing:

1. Embassy Office Parks REIT IPO – FY19 Revised Down, Yield Propped up by Zero Coupon Bond
2. India: Weaker Growth, Benign Inflation Implies Continued Monetary Easing
3. Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January?
4. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral

1. Embassy Office Parks REIT IPO – FY19 Revised Down, Yield Propped up by Zero Coupon Bond

Embassy Office Parks REIT (EOP IN) plans to raise around US$680m in its India IPO. Of this, it has already raised around US$125m from Capital Group, who came in as a strategic investor. EOP will primarily hold office assets in Bengaluru, Pune and Noida with a total portfolio size of around US$4.5bn. 

In my previous insights I’ve covered the company background, its projected growth and compared it to its main listed peer and other yield assets in India: 

• Embassy Office Parks REIT – Good Assets but Projections Might Be a Tad Too Bullish, and
• Embassy Office Parks REIT – Comparison with AIT and a Look at the Required Yield

In this insight, I’ll cover the deal dynamics, compare the revised forecast in the RHP with the earlier one from the DRHP, comment on the yield boost from the zero coupon debt and run the deal through our framework.

2. India: Weaker Growth, Benign Inflation Implies Continued Monetary Easing

The weak January industrial production data and benign inflation data for February reinforce the belief that the economy has hit a soft patch. With the government in election mode, public spending is likely to slowdown. Monetary policy is thus likely to turn accommodative to support growth given that inflation is likely to remain well inside the MPC’s target of 4%. Indeed odds are increasing for continuation of monetary easing beyond April, especially if the forecast is for a normal monsoon.

3. Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January?

For the beleaguered non-bank finance company (NBFC) sector, banks are the single largest component of external funding. This source peaked at the end of September 2018, in the aftermath of the default of IL&FS, a private unlisted infrastructure developer and financer.  However, in the beginning of the last quarter of the financial year ended March 31, 2019 (4QFY2019), when bank credit in the economy normally peaks, bank credit to NBFCs (as on January 18, 2019) has declined as compared with the previous month. The sharp spurt in bank credit at end-September probably indicates that NBFCs utilised their sanctioned limits with the banks, and top-rated NBFCs took on excessive bank loans to tide over their asset-liability mis-matches in that period. Subsequently, by early January 2019, banks may not have renewed or rolled over the NBFC bank limits, which led to a drawing down of bank credit. It therefore appears that bank finance will continue to remain tight for NBFCs in the last quarter of FY2019, as they sell their assets to banks and restrict asset growth in order to remain liquid.

4. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral

Following three years of share price declines, Chris Hoare has started to moderate his negative view on Bharti Infratel (BHIN IN). Our thesis, that Infratel would struggle as the market consolidated to three players, has largely played out. We remain wary of the viability of Vodafone Idea (IDEA IN) at current tariff levels but the ongoing capital raising at IDEA puts off the day of reckoning, while IDEA’s exit penalties (as they consolidate with Vodafone) are being paid quarterly which will flatter revenues/cash flow. We think earnings forecasts have probably bottomed for the time being and raise our recommendation to Neutral and upgrade our price target to INR270 (from INR220).