India’s inflation has been on a downward trajectory for one year, except a brief spike due to surge in food articles a couple of months back. The Reserve Bank India (RBI) has been on pause mode since February 2023.
However, the US Federal Reserve’s hawkish tone on interest rates and the recent tensions in West Asia due to the Israel-Hamas war — and the resultant surge in crude prices — have resulted in yield spikes of government securities around the world, including in India.
From about 7.15 per cent about a month ago, the yield on the Indian 10-year G-Sec has risen to 7.4 per cent levels. Other tenors of government bonds have also seen their yields harden.
The RBI has indicated that it will take measures to reduce any excess liquidity in the system, besides being fully focused on taming inflation further. Even the 182 and 364-day T-bills are nudging 7.15 per cent now.
Considering the above factors, and given the macroeconomic challenges from slowing exports due to anaemic growth in advanced economies, we may well have elevated interest rates for the next few quarters.
For investors, it may be a good idea to lock into fixed-income instruments that offer robust coupons and yield with reasonable safety.
Bonds and NCDs (non-convertible debentures) with a medium tenor of 3-5 years offer an attractive proposition.
In this regard, Piramal Enterprises has come out with an offer of NCDs for investors across tenors. The offer is open now. It will close on November 3 or earlier, depending on subscriptions (‘first come first served’ basis). Here are the details related to the NCD, which will help you in making an informed investment call.
Attractive coupons and yields
Piramal Enterprises is an NBFC (non-banking finance company). It is rated AA by ICRA and CARE. The AA rating indicates that there is a high degree of safety in servicing principal and interest payments, and very low credit risk.
The NBFC is offering NCDs for tenors of two years, three years, five years and 10 years. All the NCD tenors offer only the annual mode of interest payment. There is no cumulative option available.
The 2, 3, 5 and 10-year tenors offer coupons of 9 per cent, 9.05 per cent, 9.2 per cent and 9.35 per cent, respectively. The effective yields work out to 8.99 per cent, 9.04 per cent, 9.19 per cent and 9.34 per cent for investors for the 2, 3, 5 and 10-year tenors.
The returns on these NCDs are much higher than what most private banks and even top NBFCs offer. Though they match the best rates on the fixed deposits offered by small finance banks for similar tenors, one must not forget that NCDs are a tad riskier. These rates make the Piramal Enterprises offer quite attractive for those looking for diversification.
Data from ICRA Analytics compiled by Axis Bank indicate that 3, 5 and 10-year corporate bonds that are rated AA trade at yields of 8.47 per cent, 8.33 per cent and 8.47 per cent, respectively, in the secondary markets.
Thus, Piramal Enterprises NCDs offer 58-88 basis points higher yield over secondary market bonds with similar credit ratings for same tenors.
Most investors can consider the two, three and five-year tenors for their debt portfolio. The 10-year tenor may be too long for locking in your principal.
Invest a small portion of your debt portfolio in these NCDs, preferably to coincide with a goal, after exhausting other fixed-income options such as deposits and RBI Floating Rate Bonds.
Interest from NCDs is added to your income and taxed at the applicable slab. Tax is also deducted at source on the interest payout. The minimum investment amount is ₹10,000.
The exposure should be less than 5 per cent of the overall debt portfolio.
Stable financials
Piramal Enterprises acquired Dewan Housing Finance in 2021 through the insolvency process. During the first quarter of FY23, the company sold stakes in Shriram Finance to raise ₹4,820 crore and strengthened its liquidity position.
Over the past couple of years, Piramal Enterprises has worked to steadily reduce its wholesale lending book and strengthen its retail portfolio. From nearly 90 per cent a couple of years ago to 66 per cent in Q1 of FY23, the wholesale book was down to 45 per cent by Q1 of FY24. Piramal Enterprises has been focussing on reducing the wholesale AUM in order to improve the quality of the lending book.
Overall assets under management (AUM) have remained stable over the past five to six quarters and stood at ₹63,938 crore as of Q1 FY24. But the retail AUM has risen sharply by 57 per cent in June 2023 quarter versus the same period in 2022.
- Gross non-performing assets (NPA) fell from 3.7 per cent as of June 2022 to 2.8 per cent in June 2023.
- Net NPA declined from 1.8 per cent in June 2022 to 1.5 per cent as of June 2023.
- Capital adequacy is quite strong at 34.3 per cent as of Q1 FY24
- Despite rising rates, the average cost of borrowing has fallen from 8.8 per cent in Q1 FY23 to 8.6 per cent in Q1 FY24
Having the backing of a conglomerate such as Piramal is a positive for the NBFC. Though there is a scope for key metrics to improve, they are reasonably healthy.