As interest rates near their peaks, banks and NBFCs (non-banking finance companies) are increasing deposit rates and coupons on their non-convertible debentures (NCDs). As fixed-income options become more attractive, new names are tapping the markets for funds. Even leading NBFCs that did not raise money from retail investors directly via bond/debenture issuance before are now eyeing that market.

Cholamandalam Investment and Finance (Cholamandalam) is coming out with an NCD offer targeted at retail investors. The company is 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 a high degree of safety in servicing principal and interest, and very low credit risk. This NCD comes in three tenors and also has periodic and cumulative interest payout options. The coupons are reasonably attractive.

Here’s more on Cholamandalam’s NCD offer to help you take an informed investment call.

Healthy coupons and yields

The NBFC’s NCD offer comes in three tenors – 22 months, 37 months and 60 months. For each of these tenors, there is an annual interest payout option and a cumulative choice.

Cholamandalam offers coupons of 8.25 per cent to 8.4 per cent on these NCDs depending on the tenor chosen. The effective yields on the interest payout and cumulative options range from 8.24 per cent to 8.4 per cent.

Though not strictly comparable, these coupons and yields are higher than interest rates offered by most large (public and private) banks and NBFC deposits of similar tenors. The following table shows what Cholamandalam’s NCDs pay for an investment of ₹10,000:

Data compiled by Kotak Mutual Fund indicates that, in the 2-5-year timeframe, corporate bonds rated AA+ give yields of 7.9-7.98 per cent.

Cholamandalam’s NCDs are thus available at 30-40 basis points higher yields for investors, making them relatively attractive. The minimum investment required is ₹10,000.

Investors can consider the annual interest payout option if they require regular cashflows. Others can take the cumulative option. Since there isn’t any significantly different coupon across tenors, investors can choose any one of the three timeframes depending on their requirements – perhaps to coincide with a minor goal.

From April 1, 2023, there would be tax deducted at source on coupon payments in NCDs. In any case, all interest payouts are taxed at your slab.

Established NBFC name

Cholamandalam is one of India’s leading NBFCs with a fairly diversified lending book. As of December 2022, Vehicle financing is the largest segment, accounting for 64.3 per cent of the total assets under management (AUM). Loan against property is another key division that makes up 20.9 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 7.6 per cent and 7.3 per cent of the AUM, respectively.

  • Disbursements grew 100 per cent in 9MFY2023 over 9MFY2022 to ₹45,512 crore, the highest ever figure for the company
  • Business AUM registered an increase of 31 per cent YoY in 9MFY23 over 9MFY22 to ₹95, 468 crore
  • Cholamandalam’s tier 1 capital stood at 15.1 per cent as of December 2022, which is quite reasonable.
  • Net interest margin was stable and healthy at 7.7 per cent in 9MFY23 as against 7.8 per cent in 9MFY22
  • The cost of funds increased marginally to 6 per cent for 9MFY23 from 5.9 per cent for 9MFY22. Despite the rise, cost of funds is still quite comfortable for the company, in light of the general increase in interest rates over the past one year
  • Pre-provisioning operating profit buffers to credit costs improved a tad to 4.3X in 9MFY23 from 4.4x in FY22
  • Cholamandalam’s asset quality has been improving steadily. Gross stage-3 non-performing assets (NPAs) stood at 3.51 per cent as of December 2022, compared to 5.85 per cent in December 2021. As per RBI’s Income Recognition and Asset Classification norms, the gross NPA stood at 5.4 per cent in 9MFY23 versus 8.5 per cent in 9MFY22. The restructured book stood at 2.36 per cent as of December 2022 against 6.35 per cent in December 2021.

With robust disbursals, improving asset quality and healthy business prospects, Cholamandalam’s operational metrics appear to be on a solid wicket.

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