When bears come calling, brokers take bond route

Sonam H Udasi heads a 10-member equities research team at IDBI Capital Market Services. He has advised people to buy, sell or hold shares, when he is not doing it himself, for the better part of his 14-odd years of work life.

Last week, he did something he has rarely done before. He put his money in bonds. The research head subscribed to the non-convertible debentures (NCDs) issued by Shriram City.

Udasi is not alone. Pointing at one of his colleagues in his Nariman Point Office, he says: "This guy has been covering stocks for seven-eight years. Look at what he is doing. These are the times."

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Shriram City and Manappuram Finance are currently raising money through NCDs.

Last week, India Infoline successfully closed its Rs 750 crore (Rs 7.5 billion) NCD issue.

Most of these issues are offering interest rates between 11.5 and 12.5 per cent per annum, making them the natural choice at a time when shares are down 15 per cent year to date.

So far, eight NCD issues have raised nearly Rs 9,000 crore (Rs 90 billion), this year. Issues worth Rs 16,000 crore (Rs 160 billion) are in the pipeline, according to Prime Database estimates.

Arun Kejriwal, director, Kejriwal Research and Investment Services, who tracks the stock market with a focus on initial public offerings, says he has also applied for Shriram City.

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Kejriwal says investors are getting variety, with more companies joining the NCD bandwagon, and it's a win-win for everyone.

"One is getting variety now. Merchant bankers are busy, corporates are able to raise money and investors are fed up with poor issues in the primary market," he says.

"I have applied for all the recent NCD issues," says Ajay Pandey, VP-institutional sales, Intime Spectrum Securities. "Given the uncertainty in the markets and especially since we are in the financial services industry, it is important for us to keep at least 30-35 per cent in fixed income.

And, NCDs seem to be the best bet as they give around 12 per cent," he says, adding, "Even the equity markets have given around 15 per cent the last five years."

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Udasi says the fact that these issues come from conservative companies gives added comfort to investors.

"Companies in the north are flamboyant. Companies in Andhra are politically connected. But companies in the south are conservative, hence safe," he says.

Volatile equity markets and poor IPO returns have pushed equity investors from both primary and secondary markets to look for safer investment options with stable returns.

"When it comes to their own money, brokers are as protective as any other investor. Most brokers see the writing on the wall," says a senior analyst with a foreign brokerage.

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Many have downgraded EPS estimates for the Sensex in FY12.

From Rs 1,280 at the beginning of the year, Bloomberg consensus EPS estimates have fallen to around Rs 1,250. This will gradually fall further towards Rs 1200, expect brokers, making them bearish on stocks.

Further, the Street feels interest rates are unlikely to soften for the next two quarters, even if the RBI chooses to pause. In such a scenario, brokers are running out of ideas to sell shares to clients, let alone put their own money in these.

Word of mouth has created a bond herd among the broking community, brokers say.

"Brokers hang around in groups. If they find something good, they discuss it over a smoke or a drink and go for it together. That's what you are seeing." Udasi explains.