Infrastructure Bonds Could Fill Void Caused By HDFC Twins Merger, Says Crisil

Crisil said "concerted effort" has been made to address issues plaguing various segments in the infrastructure sector.

<div class="paragraphs"><p>A bridge girder. (Source: HG Infra Engineering)</p></div>
A bridge girder. (Source: HG Infra Engineering)

The Indian infrastructure space has seen significant turnaround—making it appealing to large global investors—and coupled with the void caused by the HDFC Bank-HDFC Ltd. merger, it could be the right time for the bond market to seize the opportunity, according to Crisil.

The rating and research agency said in the last decade, "concerted effort" has been made to address issues plaguing various segments in the infrastructure sector.

"There is better risk sharing in the contracts awarded; concession agreements have been revised to address the bottlenecks that hampered the projects; and heightened role of central agencies as key stakeholders has improved operational performance and consequently investor confidence," it said.

According to Crisil, long-term contracts ensure revenue stability and visibility.

The introduction of infrastructure investment trusts or InvITs is another positive step that has seen most of the operational assets moving into more transparent structures, with lower leverage and better diversification resulting in improved credit risk profile, it said.

"Given these developments, it is high time for domestic bond market investors to increase the allocation towards infrastructure issuances."

Bond market investors typically look for stable, long-term investment options, with pension and insurance accounting for 38% of the investments in the bond market, the rating agency said.

"Thus, exposure to debt instruments of operational infrastructure assets fits the bill. What’s more, some of these instruments provide better risk-adjusted returns, too."

Opportunity In The Merger

According to Crisil, the impending merger of HDFC Bank and HDFC by the end of next fiscal "presents yet another opportunity".

"The group will rely more on low-cost deposits rather than debt from the capital markets. The bond market can seize this opportunity and contribute to the Indian infrastructure story."

The non-banking financial companies' behemoth is one of the largest private sector issuers, cornering around 8% of the bond market.

"After the merger, the bond issuances from the combined entity are expected to trend lower than the erstwhile twins operating as separate entities, creating a supply-side gap. The resultant void offers the bond market an opportunity to fill."