Investors can subscribe to the Shriram City Union Finance's (Shriram City) public offer of three-year secured non-convertible debentures (NCD). The instrument has a superior credit rating and offers higher returns compared with the recently closed offer of India Infoline Investment Services.
Shriram City's three-year NCD option offers an annual interest payout at 11.85 per cent for investments of less than Rs 5 lakh. The rate is 11.6 per cent for other individuals.
The 11.85 per cent three-year option is attractive vis-à-vis bank deposits. The average bank deposit rate of banks is close to 9 per cent for three and five-year maturities. While not strictly not comparable, the spread between the NCD issue and bank deposit rates, in excess of 2.8 percentage points, more than compensates for the marginally higher risks.
Apart from investment grade rating, the company’s established track record (no losses in the last 10 consecutive years) and expectation of interest rates nearing the peak also make the offer attractive. The yields on similar (CARE AA) rated instruments issued by Non-Banking Finance Companies (NBFCs) in the secondary market are close to 10.1 per cent. Even if one were to look at the CRISIL rating of AA- (Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations) given to Shriram City, the returns appear attractive.
The five-year option which offer 12.1 percent per annum payout (for investments less than Rs 5 lakh) can be considered by investors with high risk appetite. This scheme has put (option to sell by the investors) and call (option for Shriram City to buy) options which can be exercised after 48 months. However, the longer duration of holding increases uncertainties on the business front.
About the company
Shriram City Union is a diversified retail financing NBFC which is predominantly engaged in financing small and medium enterprise (SME) loans, loan against gold (for SMEs) and auto financing. The company operates through 650 point of presence with high concentration in Andhra Pradesh and Tamil Nadu.
For the quarter ended June 2011, the net profit was Rs 80 crore and the interest spreads were in excess of 11.6 per cent. It has a loan book size Rs 8,005 crore on the book. The gross non-performing asset ratio as of June 2011 was 1.83 per cent. The NPA provision coverage of 76 per cent though would bring the net NPA to a low 0.44 per cent. The capital adequacy ratio too was at a comfortable 20.13 per cent as against a regulatory requirement of 15 per cent. Net NPA to capital ratio is also low at 2.7 per cent as of June 2011.
Issue details
The issue has a minimum investment amount of Rs 10,000. The offer opened on August 11 and closes on August 27; with an option to pre-close the issue. The allotment is on a first-come-first-serve basis. The issue size is Rs 375 crore with an option to retain another Rs 375 crore oversubscription. NCD holders can trade in these debentures in the secondary market (NSE and BSE) on listing. However, investors would face liquidity risks as the bond market is relatively illiquid.