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India Inc increase debt MF exposure by 14%; Reliance Industries, Cairn India, Bharti Infratel top the charts

MUMBAI: India Inc prefers to park its surplus cash in safe investment avenues rather than equities, expecting a reversal in the interest rate cycle, according to an ET analysis of top corporates' treasury operations. Companies increased investments in debt mutual funds by 14% in FY13, while paring down exposure to equities by 3%, the analysis revealed.

Topping the charts are 
Reliance IndustriesBSE -2.02 %, Cairn IndiaBSE -1.54 % and Bharti Infratel. Indian corporates, it seems, are following risk-averse retail investors in placing bets on safe, fixed-return investment instruments. The change in corporate treasuries' play, perhaps, stems from a deteriorating investment climate, lacklustre stock market and slowing economic growth.

"We invest only in our business, but in case of temporary surplus, we park our money in safer liquid instruments like debt mutual funds and bank deposits. Our mandate is to focus on our business, so we don't want to speculate," said Adesh Gupta, wholetime director and CFO at 
Grasim IndustriesBSE 0.45 %, a textile-to-cement company, which is part of the $40-billion Aditya Birla Group. To benefit from the inverse relationship between interest rates and bond prices, corporates typically invest in debt funds managed by leading asset management companies.

As interest rates fall, bond prices rise, which leads to capital appreciation, a kicker to returns from debt mutual funds. "Corporates and mutual funds believed that interest rates would fall, so debt funds attracted a lot of money. However, that expectation has not materialised so far," said S Naren, chief investment officer at 
ICICIBSE 4.88 % Prudential Mutual Fund, adding, "We believe in the medium term, interest rates have to fall for the growth rate to pick up in the economy."

Since April 2012, the Reserve Bank of India has reduced the repo rate — the rate at which the central bank lends to commercial banks and a key signal for interest rates — to 7.25% from 8.5%. As a result, the one-year return of debt funds ranged between 8% to 12% on an average, depending on the type of fund corporates have invested in. During the same period, the BSE sensex delivered a return of 8%, while a one-year fixed deposit with the state-run 
State Bank of IndiaBSE -1.33 % offered 8.75%.

Fund managers say some of the corporates who have generated huge cash flow during the year and others who have raised capital through public offers are mainly responsible for the growth of the mutual fund industry. The total assets under management of the industry increased 32% to Rs 4.89 lakh crore in FY13 over Rs3.71 lakh crore in the previous fiscal.

Reliance Industries' investments in mutual funds went up from Rs8,805 crore in FY12 to Rs24,481 crore in FY13. Energy company Cairn India's investments in debt funds increased from Rs1,767 crore to Rs9,216 crore. Likewise, Bharti Infratel's investments, too, rose from Rs 336 crore to Rs 3,891 crore.

"The main objective of corporate treasury is to safeguard the business surplus for business end-use. So in the current volatile times, investing in risky avenues is not a preferred route," said R Shankar Raman, whole-time director & CFO of engineering giant Larsen & Toubro. Fund managers expect returns on long-term debt funds to be reasonably high for at least a year or so, which would continue to attract more money from corporates.