As expected, non-convertible debenture (NCD) issues are going to be the flavour of the current investment season. After India Infoline Financial Services Ltd’s unsecured bonds offering 12.75% per annum, Shriram City Union Finance Ltd has hit the market with a public issue of secured NCDs offering 11.75% per annum. Including a Rs.250 crore oversubscription, the issue aggregates to Rs.500 crore.
There are four options; two with annual payments and two with cumulative. The bonds are also available across two tenors—three and five years (see table).
The coupon rate and effective yield in these bonds is higher for individual investors. So you can earn up to 11.75% per annum on the five-year bond with annual payout option and similarly an annual yield of 11.75% on the cumulative option over the same tenor.
The bonds will be issued in dematerialized form and are proposed to be listed on BSE Ltd and National Stock Exchange. According to the prospectus, 80% of the issue is reserved for individual investors—retail and high networth.
It is a secured issue and the credit rating is Crisil AA-/ stable and CARE AA, which indicates high financial stability and ability to fulfil financial obligations.
The company is in the business of lending and financing mainly two-wheelers and consumer goods. It also has a book of personal loans and gold loans for individuals and small enterprises. The positive is that the advances book for the company is well diversified with the largest contribution coming from gold loans of around 40%. But the flip side is that the company operates in the small loan segment (loans of Rs.1-10 lakh), where the risk of repayment is perceived as high. However, gross non-performing assets as a percentage of total advances has fallen to 1.55% from 2.27% in FY10 as the business has expanded fast. Capital adequacy, too, seems comfortable for now at around 17.4%.
Latest financials show that growth in borrowings is at a compounded annual growth rate (CAGR) of 48%, advances have grown at around 40% CAGR in the same period. A bulk of these advances are short term in nature whereas, borrowings are long term. Says G.S. Sudarajjan, director, Shriram City Union, “Credit growth has actually been good in the last couple of years. Gold loans are mostly short term in nature, hence, short-term advances are high.” During the same period, profit after tax grew at a CAGR of about 40%.
Should you invest?
Every year there are a handful of names in the non-banking financial company (NBFC) space that raise capital for the public at large. The names rarely change, which means that these companies are serious about building a base of retail funding and given the credit rating their financial health is also sound. There is risk as payouts are not assured or guaranteed and things could go wrong.
Ultimately the decision to invest is based on your perception of the company and its financial health. According to Sudeep Bandyopadhyay, managing director, Destimoney Securities Pvt. Ltd, “Clients are concerned about capital protection, so in case of NCDs one has to be careful and evaluate a firm and only invest in good quality names.” Shriram City Union is a company with over 25 years of history but the growth has come by more in the last decade. It is part of the Shriram Group and expected to expand their business nationwide.
Bandyopadhyay also felt that the issue is worth looking at for investment. Not everyone is convinced though. Suresh Sadagopan, a Mumbai-based financial planner, is wary, given the state of the economy and says that NBFCs may be hit if growth further slows down.
You can consider investing in this if you can take on moderate risk, but as suggested by Mint Money earlier, don’t over allocate as there will be other issues to choose from. The interest rate is definitely attractive and beats returns from bank as well as company fixed deposits.