3 min read.Updated: 17 Jul 2019, 12:33 AM ISTNeil Borate
Non-convertible debentures carry high risk and are taxed at slab rates
Investors can look at debt funds instead as they are more tax-efficient and less risky than NCDs
Afresh issue of non-convertible debentures (NCDs) by Shriram Transport Finance Co. Ltd (STFC), a non-banking finance company (NBFC), opens on 17 July. The company is seeking to raise up to ₹10,000 crore in this tranche which will close on 16 August. The issue comes in the middle of a storm in the credit markets, particularly surrounding NBFCs.
The issue is being offered for different tenors, ranging from 30 months to 84 months with interest rates (called coupon rates in technical terms) ranging from 9.12% to 9.70% depending on the tenor.
STFC caters to first-time buyers and small road transport operators for financing pre-owned commercial vehicles. It has a pan-India presence with a network of 1,545 branches and employs 26,630 full-time employees as of 31 March 2019. The NBFC provides financing for passenger commercial vehicles, multi-utility vehicles, three-wheelers and tractors as well as for ancillary equipment and vehicle parts such as tyres and engine replacement.
The issue has been rated AA+ (stable) by CARE Ratings and AA+ (outlook stable) by India Ratings and Research Pvt. Ltd. A rating of AA+ plus indicates a high degree of safety in terms of timely servicing of debt obligations and low credit risk. This rating stands one notch below the highest possible rating of AAA. However, agencies are known to frequently revise their ratings. For instance, ICRA Ltd assigned an AAA rating to debt issued by the IL&FS group till August 2018. The group defaulted in September 2018.
In the case of STFC, however, experts are positive about its credit profile. Feroze Azeez, deputy chief executive officer, Anand Rathi Wealth Advisors Ltd, a wealth management firm, noted that the company has a solid corporate governance track record. The duration of cash flow of assets in NBFCs in verticals like vehicle or consumer finance is much shorter compared to housing finance companies, he added. “The company does not face the same asset-liability mismatch as housing finance companies Its loans are made for a much shorter tenor to thousands of small truck operators," said Ashish Shanker, head, investment advisory, Motilal Oswal Private Wealth Management.
STFC has faced significant pressure on its stock of late. The scrip is down about 14% in the past one year and 7% annualized over the past three years. On 17 June, Piramal Enterprises Ltd sold its entire 10% stake worth ₹2,300 crore in the company. “Some of the recent negatives like higher stressed assets and the stake sale by Piramal are bearing on the stock price," said Shanker.
should you buy?
The interest on NCDs is taxed at the slab rate. Hence, investors in the highest tax bracket of 30% are likely to get a post-tax yield of 6.4-6.8%.
In comparison, National Savings Certificates (NSCs) have a pre-tax yield of 7.9% over a tenor of five years. This implies a post-tax yield of 5.53% for investors in the 30% bracket. However, NSCs carry almost no risk of default. Investors in lower tax brackets, who want a fixed interest rate, can look at government savings schemes like NSCs instead of NCDs.
Investors can look at debt funds as an alternative as they are more tax efficient and are less risky than NCDs.
“The interest on NCDs is fully taxable as per the individual tax bracket, which puts them at a disadvantage against debt funds which carry the benefit of indexation if held for more than three years," said Nishith Baldevdas, founder, Shree Financial, a Chennai-based independent financial advisory firm.
While many debt funds have been hit hard by the NBFC crisis, the capital markets regulator Securities and Exchange Board of India has brought in new norms to make them safer. Also, NCDs are inherently less diversified than debt funds, which hold multiple NCDs and other types of debt papers.
Moreover, short-term debt funds on average have given a three-year return of 5.25%, according to data from Value Research. In fact, select well-managed debt funds have delivered higher returns.
If you still want to apply for the debenture issue, you need to submit an application form to your bank or broker, authorizing the intermediary to block the amount. The bank needs to be a self-certified syndicate bank (SCSB), a list of which you can get here . Some banks or brokers will allow you to submit this form online.