With interest rates on bank deposits beginning to dip sharply, non-convertible debentures (NCDs) from companies offer a good option for investors looking to lock into higher fixed returns. These are, however, suitable only for investors with some risk appetite, as they are not as safe as bank deposits.
For such investors, the three-year NCD option from Shriram City Union Finance appears a good bet. Shriram City is a deposit taking non-banking finance company that lends mainly to retail customers and small/medium enterprises. For individual investors, the yield on the cumulative option for investments of less than Rs 5 lakh is an attractive 11.5 per cent. For more than Rs 5 lakh investments, the yield offered is 10.6 per cent. For high net worth investors, there are better options in the market at that rate. The NCDs are secured.
The rates look compelling, especially in the light of some banks cutting their deposit rates. The rates on this secured option is 1.75 percentage points more than the highest rate offered by banks. The best rate offered by similarly rated NBFC deposits is 10.75 per cent.
Go for three-year option
While the NCDs offer both three- and five-year options, the shorter-term option appears better given the regulatory uncertainties for NBFCs. The rate on the five-year option, at 11.75 per cent, is only marginally more than on the three-year option. Additionally, for investors in higher tax brackets, longer term tax-free bonds of development finance institutions may be a better option. After accounting for tax, the yield on the cumulative option of this NCD works out 8.23 per cent, 9.32 per cent and 10.4 per cent for investors in 30, 20 and 10 per cent tax brackets, respectively. NBFCs are expected to come up with more public offerings of NCDs given the constraints on fund raising through traditional channels such as banking. This would mean no dearth of NCD issues. Investors have to also take note that high exposure to NBFCs increases the risks to their debt portfolio.
Business
The NCD has Crisil’s investment grade rating of AA- which is three notches below the highest rating. But it signifies “high degree of safety regarding timely servicing of financial obligations.” Such instruments carry very low credit risk.
As of June 2012, the loan assets managed by Shriram City amounted to Rs 14,889 crore . Loans against gold and lending to small enterprises account for 70 per cent of the total assets, followed by vehicle loans. The net profits for the year ended March 2012 and the quarter ended June 2012 were Rs 342 crore and Rs 103 crore, respectively. Profits have grown 41 per cent compounded annually during the period 2007-08 to 2011-12. The net NPA ratio as of June 2012 was 0.38 per cent. The capital-adequacy ratio is 15.8 per cent against the RBI requirement of 15 per cent.
Issue details
The NCD issue size is Rs 250 crore with an option to retain oversubscription of another Rs 250 crore. The issue opens on September 12 and is on a first-come-first-served basis. NCD holders can trade in these debentures in the secondary market (NSE and BSE) on listing. However, investors could face liquidity risks as the bond market is relatively illiquid.