There is a sense of calm after a period of volatility in the bond markets over much of October. Even as interest rates have been increased to record levels in the advanced economies and to high levels in India, inflation has come under control globally. With geopolitical tensions surfacing, October, though, was a tough month for the bond markets as yields on government securities rose to multi-decade highs (over 5 per cent in the US), while Indian yields spiked 25-30 basis points before moderating towards the end of the month.
The thesis of interest rates nearing their peaks globally and yields being close to the top are entrenched in the markets.
Such being the case, it may be a good time for investors in fixed-income instruments to make the most of elevated interest rates and coupons available currently.
NBFCs (non-banking finance companies) have increased coupons on their non-convertible debentures (NCDs) in recent months. From not tapping the retail market earlier, leading NBFCs, after tasting success with their maiden issues, are looking to return more often.
Cholamandalam Investment and Finance (Cholamandalam) is again coming out with an NCD offer targeted at retail investors. The company mainly into vehicle financing. The other key segment is loan against property (LAP), apart from home loans. Cholamandalam has also entered a few newer verticals for lending.
The issue is rated AA+ (stable) by India Ratings and ICRA, indicating high safety in servicing principal and interest and very low credit risk. This NCD comes in three tenors and has periodic and cumulative interest payout options. The coupons are reasonably attractive.
Here’s more on Cholamandalam’s NCD offer to help you make an informed investment call.
Robust yields
The NBFC’s NCD offer comes in three tenors – 24 months, 36 months and 60 months. For each of these tenors, there is an annual interest payout option and a cumulative choice.
Cholamandalam offers coupons of 8.4 per cent, 8.5 per cent and 8.6 per cent, respectively, for the three tenors when annual payouts are taken on these NCDs. The effective yields on the interest payout and cumulative options range from 8.39 per cent to 8.59 per cent.
Data from Axis Bank (sourced from ICRA Analytics), indicates that corporate bonds rated AA with three-year tenor trade at 8.46 per cent yield on an average presently, while the yield on 5-year bonds is 8.32 per cent.
Cholamandalam’s NCDs with three-year tenor are available at 8.49 per cent yield, almost at par with what is available in the corporate bond market. But the five-year tenor NCDs with 8.59 per cent yield are at 25 basis points higher yield. The minimum investment required is ₹10,000.
Investors can consider the three and five-year tenors with annual interest payout options if they require regular cashflows. Others can take the cumulative option.
From April 1, 2023, tax is deducted at source on coupon payments in NCDs. In any case, all interest payouts are taxed at your slab.
Strong NBFC
Cholamandalam finances multiple segments across a diversified client base.
As of September 2023, Vehicle financing is the largest segment, accounting for 61 per cent of the total assets under management (AUM). Loan against property is another key division that makes up 20 per cent of the AUM. Home loans and new verticals – consumer and small enterprise loans, secured business and personal loans, and small and medium enterprises loans – account for 9 per cent and 10 per cent of the AUM, respectively.
- Disbursements grew 49 per cent in 1HFY2024 over 1HFY2023 to Rs 41,557 crore
- Business AUM registered an increase of 42 per cent YoY as of September 2023 to Rs 124,246 crore
- Cholamandalam’s capital adequacy as of September 2023 was at a reasonable 16.62 per cent
- Net interest margin was healthy at 7.4 per cent in 1HFY24 as against 7.8 per cent in 1HFY23
- The cost of funds increased to 6.9 per cent for 1HFY24 from 5.8 per cent for 1HFY23. In light of the general increase in interest rates over the past one year, this is quite reasonable.
- Cholamandalam’s asset quality has been improving steadily. Gross non-performing assets (GNPA) decreased to 4.07 per cent in September 2023, from 5.84 per cent in September 2022. Net NPA fell to 2.59 per cent from 4.07 per cent over the same period.
With robust disbursals, improving asset quality and healthy business prospects, Cholamandalam’s key metrics look robust.
The offer is open from November 28 and subscribing immediately would improve the chances of getting allotment.