Name of the product
Shriram City Union Finance Ltd’s NCD.
What is it?
It is a secured NCD through which the company plans to raise Rs 375 crore; it can retain oversubscription up to Rs 375 crore.
What do you get?
There are two series on offer. Option I for five years comes with put and call options that can be exercised at the end of 48 months from allotment, and option II for three years. A put option allows the holder to sell the bond back to the issuer and a call option enables the issuer to buy the bond back from the holder at the end of four years. For individual investors investing up to Rs 5 lakh, option I offers 12.1% per annum; option II offers 11.85% per annum. For individual investors investing above Rs 5 lakh, the rates are 11.85% per annum for five years and 11.6% per annum for three years.
Each NCD is worth Rs 1,000. Investors need to buy at least 10 NCDs. Interest is payable annually. The first interest payment will be made on 1 April 2012 for the period between the date of allotment and March 2012. The last payment will be made at the time of redemption on pro rata basis.
The company is already has a high debt-equity multiple of 6.05, according to its offer document. Post-issue, if the entire Rs 750 crore gets subscribed, this will increase to 6.66. This is a fairly high level of debt even for a non-banking financial company (NBFC) like Shriram City Union. Additionally, its capital adequacy ratio at 20.53%, albeit, higher than the Reserve Bank of India’s prescribed limit of 12%, is close to the lowest it has maintained in the last five years; only in 2008, it was lower at 20.25%. This ratio indicates that in order to grow further, the company may have to raise additional capital more aggressively.
Being an NBFC, the company’s product portfolio comprises vehicle loans (24%), loans against gold (28%), loans to small enterprise (24%) and product finance loans (15%), among others. Close to 90% of its loan book is secured mainly with the asset under financing as collateral. While the company has so far maintained a low level of non-performing assets, it does lend to individuals and small enterprises that have less access to low-cost funds, thereby inherently raising the risk of its underlying customer base.
The debenture issue has been rated AA-/stable by CRISIL and CARE AA by CARE for investment up to Rs 750 crore. A “AA” rating suggests that a company has high ability for debt serving and low credit risk, but the modifier “-” suggests that within its category the company’s comparative standing is below average.
Mint Money take
With higher returns comes higher risk. So the NCD is suitable only for investors who are willing to take the risks. Investors with low risk appetite can look at fixed deposits of similar tenors that are giving about 8.5-9.5%.