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Hello Africa

India’s billionaires are taking advantage of the lowest dollar borrowing costs in a year to expand in Africa’s booming commodities and telephone markets.

Venugopal Dhoot’s Videocon Industries is seeking $1.4 billion in loans to develop gas fields in Mozambique, according to a person familiar with the matter. Naveen Jindal’s Jindal Steel & Power raised $150 million for coal mining in Mozambique and South Africa, while Sunil Mittal’s Bharti Airtel raised a similar amount for phone networks in Kenya and Rwanda. The average yield on Indian dollar bonds fell 151 basis points in 2012 to 5.32 per cent, HSBC Holdings data show. A similar gauge for Asia slid 90 basis points to 3.81 per cent.

Indian companies are boosting efforts to build businesses and buy natural-resource assets in Africa after achieving only 50 per cent of the $12.7 billion of buyouts on the continent that Chinese investors announced in the past decade. Funding for overseas projects is supporting India’s dollar debt market, after foreign-currency borrowing fell 61 per cent this year amid the worst economic slowdown at home in almost a decade.

“Indian companies’ success in raising money overseas for their African expansions shows lenders see value in the ventures,” P. Phani Sekhar, a trader in Mumbai at Angel Broking, said in an interview on July 18. “Africa offers access to large reserves of natural resources, as China has shown.”

Demand for dollar loans may increase as more local firms plan African ventures. Bharat Petroleum, India’s second- biggest state refiner, may spend $2 billion as its share of the cost of developing a $20 billion gas project in Mozambique, Chairman R.K. Singh said last month.

Going to Africa

A joint venture between Mumbai-based Tata Power and South Africa’s Exxaro Resources, may build a hydroelectric plant in the Republic of Congo, Ernst Venter, a general manager at Exxaro, said in an interview last month. Economic expansion in sub-Saharan Africa will “remain strong” this year as demand for natural resources helps offset global risks including Europe’s debt crisis, the International Monetary Fund said in a statement in May. The IMF has forecast growth in the region at 5.4 per cent this year, compared with an estimated increase of 3.5 per cent in world output.

“With growth in developed nations slowing, Indian companies are looking to developing regions like Africa,” Rahul Mundra, a senior syndication manager in Mumbai at Axis Bank, ranked fourth in arranging overseas loans for Indian firms in the past three years, said in an interview. “Africa has a lot of new infrastructure and capital expenditure requirements.”

Mahindra, Maruti investment

Mahindra & Mahindra, India’s biggest maker of utility vehicles, plans to set up a manufacturing plant in Kenya, Sanjay Jadhan, a senior general manager, told reporters in Nairobi. Maruti Suzuki India, India’s biggest carmaker by volume, plans to boost exports to Africa, Chief Financial Officer Ajay Seth said in an interview in New Delhi.

IDBI Bank Ltd and SBI Capital Markets are arranging the loan for Aurangabad, India-based Videocon, the person said, asking not to be identified because the information is private. Chairman Dhoot couldn’t be reached for comment after two calls to his office. He also didn’t respond to an e-mail. The company currently has the equivalent $1.8 billion of debt outstanding due by 2020, according to data compiled by Bloomberg.

Jindal Steel & Power, India’s second-biggest steelmaker by market value, offered to pay a premium of 330 basis points of the London interbank offered rate for the 4 ½-year loan, Rajesh Bhatia, executive vice-president of finance, said in a phone interview. Vikrant Gujral, vice-chairman and head of global ventures at Jindal Steel & Power declined to comment on the company’s African businesses.

Borrowing dollars

Bharti Airtel, India’s largest mobile-phone operator, borrowed from Axis Bank, according to a person familiar with the matter, who declined to be identified because the details are private. It will invest $100 million in the central African nation of Rwanda over the next three years, according to an e-mailed statement on March 30. The company is also expanding in Kenya after acquiring the assets of Kuwait’s Mobile Telecommunications Co. Raza Khan, a New Delhi-based spokesman for Bharti Airtel, declined to comment.

The companies are borrowing in dollars to reduce costs as interest rates in India are the highest among major Asian economies after a record increase through 2010 and 2011. The Reserve Bank of India raised the repurchase rate by 375 basis points in the last two years to curb inflation, before cutting it by 50 basis points to eight per cent in April. Central bank rates are at three per cent in China, South Korea, Malaysia and Thailand.

Save costs

Foreign-currency borrowings also help guard against increased volatility in the rupee, Asia’s worst-performing currency of the past year with a 19 per cent loss, according to SJS Markets.

“Raising money in dollars instead of rupees helps these companies save on interest costs,” Hemant Dharnidharka, Bangalore-based head of credit research at SJS Markets, said in an interview. “Earnings from their overseas businesses will be in dollars and taking a loan in the same currency acts as a hedge.”

The yield on 10-year sovereign debt in India is at 8.08 per cent, compared with 3.30 per cent in China and 3.18 per cent in South Korea, according to data compiled by Bloomberg. The notes offer an extra yield of 658 basis points over US Treasuries.

Indian bonds returned 8.9 per cent in the past year, trailing the 19.1 per cent earned by Indonesian securities in the region’s best performance, HSBC indexes show.

Civil unrest

Bond risk for Indian companies declined this year. The average cost of five-year credit-default swaps insuring against non-payment by seven local issuers dropped 98 basis points since December 31 to 363, according to data provider CMA, which is owned by McGraw-Hill Co, and compiles prices quoted by dealers in privately negotiated markets.

Businesses entering Africa face risks from political instability in the region, according to Axis Bank’s Mundra.

Punj Lloyd Ltd, India’s third-largest engineering firm, said in February that its projects in Libya may be disrupted because of civil unrest. The company plans to resume work this month in the North African nation where it has $800 million worth of projects, Chairman Atul Punj said in June.

“With the amount of civil unrest in Africa, more mechanisms are needed to help mitigate risks for banks to be comfortable lending to companies wanting to expand there,” Mundra said.

Following China

Still, Indian companies are following the example of Chinese counterparts in seeking to tap Africa’s growing markets. China’s two-way trade with the region hit $166 billion in 2011, three times the 2006 amount, President Hu Jintao said in Beijing, promising $20 billion in new loans to the continent. In December, Fitch Ratings estimated that China’s Export-Import Bank lent $67.2 billion to sub-Saharan Africa between 2001 and 2010, overtaking World Bank lending of $54.7 billion.

“A lot of Chinese companies are already in Africa and Indian companies have seen that and want to be a part of the growth story,” Joseph Jimmy, a Mumbai-based principal associate with law firm Amarchand Mangaldas & Suresh A Shroff & Co said in a telephone interview. “There are also quite large Indian populations in some African countries and hence a degree of familiarity with how to do business there.”