Expert Analysis of the Global Macro Events & News affecting the Indian Markets

WEEKLY SYNOPSIS

Akasa Air: Soft Landing or a Crash?

The first industry I learned about when I started working was aviation. And here’s what I understood – Aviation has too many turbulences, pun indeed of course. The sector isn’t difficult to understand but it is highly competitive and fragile for businesses operating it. We hear about airlines crashing more than airplanes. Last it was GoFirst, before that there was Air India’s debt, and then there are the famous cases of Jet Airways and Kingfisher Airlines. I think it’s time for us to expect these crashes and not be surprised anymore. 

We have, in the past seen airlines fall apart for many different reasons, but the epicentre of these problems has always been seen to be money. This time, however, it’s very different for Akasa. Let’s first start by understanding the airline.

A Toddler Airline

Backed by Rakesh Jhunjhunwala and his family, Akasa was launched with the idea of making air transport accessible in tier-2 and tier-3 cities but just within a year, it is ready to cross borders. Akasa started small but it soon went on to take over five percent of the market share from other players. Akasa, in it’s first year has done something no other airline in the world could do in decades. It has become the first airline to go from having zero aircraft to twenty aircraft within a year.

Source: ETtravelworld.com

This month, however, Akasa’s market share fell down one percent. The airline lost 25% of its market share for quite an unexpected reason in just one month. The reason you’d ask? It’s the pilots. Over forty pilots resigned last month leaving the airline crippled of its most important human resource. This incident is Akasa’s first major barrier in operations and crisis management has turned out to be fairly expensive. Akasa had to cancel 600 flights in August and some more this month. Additionally, it also had to give compensations to the customers worth 20 million rupees. In response, Akasa has sued the pilots seeking compensation of 220 million rupees but civil aviation authorities are not helping Akasa out. 

Dive into Data: The resignation of pilots, followed by violating the notice period contract seems like a pattern. Look at it here:

Source: Outlook Business

A Billion Dollar Valuation

While Akasa is having a difficult time dealing with this unforeseen crisis, management continues to stay positive. The airline is now looking to raise 400 million dollars which will increase the value of the business from 650 million dollars to over a billion. The plan is to double the number of pilots and start international operations very soon. 

It seems Akasa can deal with this crisis and sustain through it, but we can only wait to see what will happen. 

Since we are discussing fund raising, let’s now move on to Corporate Bonds, an asset class unexplored in India. 

Bonding with the Growth: Corporate Bonds

People usually tend to skip the “Bonds” part whenever one talks about investment classes available to investors. Probably because they find it complex and mostly because India’s corporate bond market is not as developed as other alternative investments. 

Why are we talking about all this? Recently, JP Morgan has said that it plans to include Indian Government Bonds in its benchmark emerging market index from June 2024. 

What does it mean for India? Is it positive, Is it negative? Well, that’s the topic for another day. Let me help you detangle everything related to bonds today, especially with respect to India.

In simple words, a bond is a loan that you can lend to the government or a company. You also receive regular interest payments until the full principal payment is paid. You can even sell that bond further. And that is how bonds work and are traded in markets. Government bonds aka sovereign bonds are the most secure and liquid ones because they are backed by the government itself. But we’ll be keeping our discussion to corporate bonds i.e., one issued by companies. By the way, the 10-year yield (return) on government bonds in India is around 7.15%.

Many Indian companies like ICICI, Aditya Birla, and HDFC have bond funds. Yield-to-maturity (or lets say cost of obtaining the funds for a corporate borrower) vary depending on time to maturity, liquidity, and security. Let us understand it via a simple example. A company with a low credit rating who is raising funds for a risky project with a short-term maturity would offer you a high yield which would include liquidity, credit, and risk premium. 

This is the basic concept of bonds. Now before starting with India’s corporate bond market let’s have a look at some data that would further nurture our understanding.

Facts:

• The US and China make up 55% of the global bond market.
• India’s bond market has grown fourfold since 2012.
• Indian bond issuance could hit a record high this fiscal year to 9 trillion rupees.

Retail Participation: Premature Stage

Retail participaton in corporate bonds market is at the first stage building stage in India. The main reason can be attributed to private placements taken by big corporations. Private Placement is when companies offer their bonds directly to a few select private investors like institutions. This leaves little or no room for retail investors. The secondary bond market in India is not very developed. And unlike equity markets, education about corporate bond market is very limited in India and thus the market remains more or less untapped. Also, the interest on bonds is taxable at your income tax rate, and the long term capital gains are taxed anywhere from 10-20% depending on the issuer. 

Why is developing the Corporate Bond market in India important?

• If the market is mature, it gives access to low-cost funding to corporations.
• Mitigation of risk to a diverse pool of investors and not just institutions

This was all about the basics of the Bond Market in India. Do you know the global rating of India’s sovereign bonds? It is Baa3 which is similar to BBB- by Fitch. It puts India into a moderate risk category. Although, these are the lowest ratings in the Investment Grade bracket. This is not a surprise, considering India is a growing economy. 

Dive into Data:

Left: Moody’s rating for various emerging countries

Right: Moody’s rating chart and what it means

Do you know that companies in a company cannot be rated higher than the government bonds but you’ll find many corporate bonds rated AAA, which is the highest grade? It is because of the difference between agencies. Domestic bonds are rated by agencies like Crisil assessing the credit quality on the national level whereas government bonds are rated on a global macroeconomic level. Only Singapore and the US have AAA-rated bonds in the world.

Coming back to the JP Morgan news, in short, the inclusion will give access to Indian Government Bonds to foreign investors and lead to inflows of $20 billion to Indian markets.

Maybe, that is when the Indian bond market will get the desired traction from investors. 

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Green Portfolio is a SEBI Registered (SEBI Registration No. INH100008513) Research Analyst Firm. The research and reports express our opinions which we have based upon generally available public information, field research, inferences and deductions through are due diligence and analytical process. To the best our ability and belief, all information contained here is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use.