Asia Credit:Reliance vs.Bharti

　　Earnings kick off.

　　Reliance and Bharti have kicked off the March quarter earnings season forIndian corporates under our coverage. We discuss their results in more detaillater, but numbers broadly look strong on the operational side, albeit leveragehas increased a bit. As for the bonds, we are currently neutral on both, givenvaluations and are waiting for a better entry point. Fundamentally, they remainsolid credits. Relative to each other, Bharti is currently trading roughly 20-25bpwider than Reliance, at the tighter end of historical range (Figure 2). WithRJIO's launch estimated in June (per our equity colleagues), we prefer Relianceover Bharti at this stage, just between the two names. This is also givenReliance's bigger size, lower net leverage and higher rating, which more thanoffset the cyclical nature of its business for us.

　　Reliance bonds.

　　Reliance bonds are almost back to early Aug'15 levels (pre-RMB devaluation)and just 20-25bp from all time tights. They are amongst the tightest trading inIndia IG (Figure 1), and rightly so, given highest credit rating in the space.

　　Having said this, we think the upside is limited from here. Their YTDperformance is also broadly in line with other Asian refining & petrochemicalnames (Figure 5). Hence, maintain Hold. On the curve, we see the 2022s and2040s as more attractive. Since the start of the year, short end is slightly wider,belly is marginally tighter and long end is materially wider (Figure 3). Keyupside risks include deleveraging post the ongoing capex cycle, RJIO'ssuccess, etc., while downside risks are cyclicality of refining andpetrochemicals business, and higher than expected capex spend on RJIO.

　　Bharti bonds.

　　Contrary to Reliance, Bharti is amongst the widest trading credits (Figure 1).

　　While this is not justified fundamentally, weaker underlying corporates areSOEs and benefit from that status. Bharti also suffers from the overhang ofRJIO's impending launch and potential participation in upcoming spectrumauctions. Having said this, its bonds have staged an impressive rally from thewides this year, tightening by approx. 100bp from the lows in Feb, though theyare still around 30-40bp wide from all time tights. Separately, they haveperformed largely in line with regional comps (Figure 6). Maintain Hold.

　　Bharti's curve has steepened a bit (Figure 4) and comparatively the 2024sappear the cheapest. Key downside risks are price war post RJIO, aggressivebidding in upcoming spectrum auctions and new supply, while upside risks arefurther asset sales, commitment to maintaining IG ratings, etc.

　　India IG strategy.

　　As highlighted in our last Asia Credit Monthly, we started the year with apreference for corporates over banks and private sector over SOEs. Whilecorporates have broadly performed in line with banks, privates haveoutperformed SOEs within corporates. We now have a bias towards thelaggard SOEs. We have also turned neutral overall on Indian IG corps as mostof the underperformance has been recouped, and with the RBI rate cut behindus for now, there are a few event risks on the horizon - possible increase insupply, state elections, expiry of RBI governor's term, etc. We do acknowledgethat some positive headlines could come from the passage of bankruptcy codein the ongoing Parliament session and better monsoon than the past couple ofyears.