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NCDs offering 11-11.6% open on 27 June

NCDs offering 11-11.6% open on 27 June
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First Published: Wed, Jun 22 2011. 09 16 PM IST
Updated: Wed, Jun 22 2011. 09 16 PM IST
On 27 June, Shriram Transport Finance Co. Ltd will open the public issue of its non-convertible debentures (NCDs). The issue will remain open till 9 July. Allotment will be done on a first-come, first-served basis.
The bond is suitably priced for retail investors given its face value of Rs 1,000 and minimum investment limit of Rs 10,000. With equity markets volatile with a downward bias and interest rates on their way up, this product is an attractive investment proposition.
Also See | Issue Details (PDF)
According to R. Sridhar, managing director, Shriram Transport Finance, “We are more inclined to raising fixed-rate loans and are broadening our investor base. Our aim is to have 20-25% of overall financing from retail loans.” The current issue of NCDs will add to the overall debt capital for the company. The company aims to raise between Rs 500 crore and Rs 1,000 crore through this issue.
What do you get?
The interest rate is in the range of 11-11.6%, depending on the tenor and type of investor (see table). Interest is payable annually and will be taxed at your marginal tax rate.
You can invest for five years or three years. The five-year bond comes with a put and call option at the end of 48 months—you can exit early if you want to; the company, too, can call for early redemption.
You can buy the bonds from the company’s website or visit a specified bank or broker— list is available in the issue prospectus.
Crisil Ltd has given AA/stable for investments up to Rs 1,000 crore; it has got an AA+ from CARE Ltd.
What are the risks?
For retail investors, it makes sense to hold the bond till maturity and that involves credit risk. The bond has got good rating and, additionally, financial data we looked into also suggests the company is comfortably placed to meet its debt obligations.
Being a non-banking finance company, Shriram Transport Finance is primarily involved in borrowing and lending and operates mostly in financing of pre-owned commercial vehicles. As per the company’s annual report for 2011, its gross non-performing assets are 2.6% of total assets under financing activities. Given that their primary business is lending, this shows that recovery of assets or loans is not much of a concern. Additionally, according to its annual report, the company has a capital adequacy ratio of 24.85% against the stipulated 12% by the Reserve Bank of India. Capital adequacy ratio measures how much capital a finance company holds compared with its risky assets (money lent to customers). Among other things, this ratio helps judge the safety of depositors or those who have lent money to the company and the financial stability of a company.
There are other risks involved in bonds, such as liquidity risk and interest rate risk. These are relevant if the bond investor is likely to trade rather than hold till maturity. Says Mumbai-based financial planner Suresh Sadagopan, “Retail investors are more tuned towards real investing in bonds rather than trading.”
Mint Money take
The bond will offer a higher interest rate than most bank fixed deposits (FDs) and company FDs. Most banks are offering 8-9% on five-year FDs. Few other fixed-income options will offer this rate.
Hold till maturity to maximize returns from interest payments. Sadagopan says, “We may be close to the height of the interest rate cycle, so its an opportunity for investors to lock in their investment at a good rate.”
Since allotment is on first-come, first-served basis, you better be among the first few.
Graphic by Yogesh Kumar/Mint
lisa.b1@livemint.com
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First Published: Wed, Jun 22 2011. 09 16 PM IST