SREI Infra NCD issue – Good buy for investors with moderate risk and lower tax bracket

#SREI Infra Finance issue of secured NCD of Rs. 250 Crore with an option of retaining upto Rs. 1000 Cr.  to be launched on Sep 7, closing on sep 29, 2016.  
About the company – #SREI Infrastructure Finance Ltd, is a RBI registered non-deposit taking NBFC. Classified as an “Infrastructure Finance Company” in the year 2011 by RBI. The company was originally incorporated in New Delhi on March 29, 1985 by the name Shri Radha Krishna Export Industries Limited with the Registrar of Companies, Delhi & Haryana, in accordance with the Companies Act 1956 as a Public Limited Company, to undertake lease and hire purchase financing, bill discounting and manufacture and export of certain goods. Company’s name was changed to Srei International Limited on May 29, 1992 and further changed to Srei International Finance Limited with effect from April 12, 1994. The name of the Company was further changed from Srei International Finance Limited to its existing name Srei Infrastructure Finance Limited on August 31, 2004. Company is registered as a Non-Banking Financial Company within the meaning of the Reserve Bank of India Act, 1934.
About the issue
From liquidity crunch to overflow, the market has seen a major shift of sentiment in past 6 months. The equity IPOs to Bond issues investors are lapping it up all.
After an overwhelming response of two tranches of DHFL Secured NCD issues, SREI is next on the block. SREI’s base issue at Rs. 250 crore, may retain up to 1000 crore with green-shoe option
Features in details –
Issue open and close – Opens on 7th September 2016, closes on 28th September 2016, however, the allotment is on first cum first served basis and the company may close issue on oversubscription within a day or two as well.
The NCD Bond – SREI is offering NCDs which are backed by security/assets. Hencce, the capital investment is secured by SREI, incase of non-payment/ non-liquidity invesors has the right on liquidating the secured asset to recover the cost.
Tenor – 400 days, 3 years and 5 years
Annual yield – Upto 10%, depending on tenor and interest payout option
Face value – Rs. 1000/ unit
Minimum and maximum investment –  The minimum application amount is Rs. 10,000 collectively across all options on NCDs and in multiples of One (1) NCD after the minimum application.
Categories of Invstors and allotment ratio – 
Category I – Rs. 200 crore
Category II – Rs. 200 crore
Category III – Individual & HUF Investors – Rs. 600 crore
NRIs, QFIs and foreign nationals cannot invest in this issue.
                                               
Credit Rating – SREI has received an AA+ from BWR, which s second highest rating after AAA, making it a safe investment option. This issue has received one notch better than last Secured NCD issue of last year which was at  AA.
Format  – Investors can hold both in physical or demat format, demat is not mandatory.
Listing – will be listed on both exchanges – BSE and NSE
Trading – Allowed from the first day, no lock-in period
Taxation – Though the dematerialised NCDs don’t attract TDS, the investment will taxed at short term (less than a year) and long term (debt investment more than a year are taxed at 10%) depending on the holding period. The interest will be taxed as per the tax bracket of the investor.
Series
I**
II#
III***
IV**
V#
VI
VII**
Frequency of Interest Payment
Cumulative
Monthly
Annual
Cumulative
Monthly
Annual
Cumulative
Minimum Application
Rs. 10000 (10 NCDs)
Face Value/ issue price
Rs. 1000/-
In multiples of
1000 (1NCD)
1000 (1NCD)
1000 (1NCD)
1000 (1NCD)
1000 (1NCD)
1000 (1NCD)
1000 (1NCD)
Tenor
400 days
3years
5 years
Coupon per annum
NA
9.35%
9.75%
NA
9.6%
10%
NA
Effective Yield (per annum) for Category I, Category II & Category III Investor(s)
9.08%
9.76%
9.82%
9.75%
10.02%
10.04
10.00%
Mode of Interest Payment
Multiple mode
Amount (` / NCD) on Maturity for Category I, Category II & Category III Investor(s) **
Rs. 1100
Rs. 1000
Rs. 1000
Rs. 1322
Rs. 1000
Rs. 1000
Rs. 1611
                                                             
Application Form for SREI Infra NCDs – Click here
Financial Health of the company – Annual Results Consolidated Figures in Rs. Crores / View Standalone
Mar-13
Mar-14
Mar-15
Mar-16
TTM
Sales
3,188.74
3,235.17
3,339.32
3,234.14
3543.88
Expenses
518.89
521.11
696.54
629.96
945.64
Operating Profit
2,669.85
2,714.06
2,642.78
2,604.18
2598.24
OPM
83.73
83.89
79.14
80.52
74.7
Other Income
25.8
25.19
21.24
27.8
49.29
Interest
2,139.25
2,350.28
2,274.15
2,310.75
2278.94
Depreciation
193.62
163.35
201.43
215.29
225.66
Profit before tax
362.78
225.62
188.44
105.94
142.93
Tax
102.71
88.11
67.04
44.41
51.31
Net Profit
263.18
138.51
129.11
72.52
100.77
EPS (unadj)
5.14
2.67
2.46
1.34
Dividend Payout
15.88
18.18
19.49
34.69
Compounded Sales Growth:
Compounded Profit Growth:
10 Years:
25.49%
10 Years:
-2.15%
5 Years:
14.66%
5 Years:
-17.86%
3 Years:
0.47%
3 Years:
-36.30%
TTM:
10.78%
TTM:
13.93%
*data – www.screener.in
After a difficult period of three years, company has seen a upward trend in last one year. The balance sheet and P&L sheet reflects the same.
Should you invest in #SREI secured Non-Convertible Bonds? 
It is a good debt investment  option with high yield and attractive tenor spread of 400 days, 3 years and 5 years. #NCDs are being offered by reputed infra-finance company, having a minimum investment requirement of Rs. 10, 000. The NCDs are secured, backed by assets, which means incase of default/ non-payment, assets can be liquidated to repay the debts.
The #coupon rate across segment is expected to be just above 1.5- 2 % from any bank FDs at this point of time. While a bank FD is offering 7.5% interest on yearly deposit, 400 days option is giving a good 1.5% extra return. Also, after a rough patch, the financial health of the company has improved thus interest payment ability. Brickworks has given it a thumbs up by giving it notch higher Rating of AA+ in the latest issue.
A person with moderate risk profile can invest a part of fixed income portfolio in this issue. Person in lower tax bracket will get to see higher return.


Risks in this issue – 
·         NBFC Business is particularly vulnerable to volatility in interest rates
·         SREI is in infrastructure sector, which has seen lull for over five years
·         Any increase in the levels of non-performing assets in loan portfolio, for any reason whatsoever, would adversely affect the business, results of operations and financial condition   
·         SREI derive majority/substantial of our revenues from our top 20 borrowers. Inability to maintain relationship with such borrower or any default and non-payment in future or credit losses of our single borrower or group exposure where they have a substantial exposure could materially and adversely affect business, future financial performance and results of operations

DHFL NCDs issue – should or shouldn’t buy – NCD review

View: Neutral NCD issue review
DHFL NCD Issue opens on Aug 3, 2016, closes on August 16, 2016
Should or should not buy? What to look at? Is it safe? Will it give high returns? What are the risk involved?
About the company – #DHFL, is a deposit-taking housing finance company registered with the NHB and focused on providing financing products for the #LMI (Lower Middle Income) segment in India primarily in Tier II and Tier III cities and towns since 1984. They are known for providing secured finance primarily to individuals, partnership firms and companies for the purchase, self-construction, improvement and extension of homes, new and resalable flats, commercial properties and land. They also provide certain categories of non-housing loans including loans for commercial property, medical equipment, and for plant and machinery.

About the issue

DHFL, NCD issue opens on August 3, 2016, a public issue of secured redeemable #Non-Convertible Debentures (“NCD”) of face value of Rs. 1,000 each aggregating up to Rs. 4,000 crore. The Issue is scheduled to close on August 16, 2016, with an option of early closure or extension as decided by the Board of Directors of our Company (“Board”) or the Finance Committee.

The NCDs received the highest credit rating ‘CARE AAA (Triple A)’ by Credit Analysis and Research Limited (“CARE”) BWR AAA (Pronounced as BWR Triple A) by Brickwork Ratings India Private Limited (“Brickwork”). The rating of CARE AAA by CARE and BWR AAA, Outlook: Stable by Brickwork indicates that instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations signifying the instrument carries lowest credit risk.
·         The minimum application amount is Rs. 10,000 collectively across all options on NCDs and in multiples of One (1) NCD after the minimum application. Maximum limit of a retail investor is Rs. 10 lakh.
·         Allotment is on a first-come-first-serve basis (except on the date of oversubscription, if any, when all the investors applying on the said date will get allotment on a proportionate basis).
·         Investors have an option to apply for NCDs in dematerialized as well as physical form
·         Category IV Investors (Retail Individual Investors) are defined as Resident Indian individuals and HUFs allowing investment upto 10 lakh
·         Investors can apply through ASBA, the NCDs are available both in physical and Demat format
Issue Structure
The issue is divided into 10 series depending on the tenure of the series and coupon payment. And divided into 4 categories – category I, II, III, IV.
  •  Interest on Application Money is at 8.00% p.a. and Interest on Refunded Money is at 6.00% p.a
  • Tenure of the NCDs are 3, 5 and 10
  • Coupon payment options – monthly, quarterly and annually
  • The interest payout metho includes NEFT, RTGS, Direct debit
  • Floor rate on interest rate for all categories is 8.90% and cap on interest rate for all categories is 9.50%.
  • Series X is a Consumer Price Index (CPI) linked instrument (Floating Rate Instrument) has a tenor of 3 years and the Coupon Rate for Category I & II investors is currently 9.10% (Reference CPI + 4.08%); and that for Category III and Category IV investors is currently 9.20% (Reference CPI + 4.18%). 12 month average for the period before the record date (currently at 5.02%; Source http://mospi.nic.in.  

Allotment is first come first served basis
Issue size and allocation
QIB: Rs. 800 Crore
Corp: Rs. Rs. 800 Crore
HNI: Rs. 1200 crore
Individual: 1200 crore
Total : 4000 crore
Interest rate:
For individuals
9.20% p.a for 3 years
9.25% p.a for 5 years
9.30% p.a for 10 years
For Non-individual
9.10% p.a for 3 years
9.10% p.a for 5 years
9.10% p.a for 10 years
#NRI investors cannot invest in this issue
My Take – #NCDs are being offered by reputed housing finance player, having a minimum investment requirement of Rs. 10, 000. The NCDs are secured, backed by assets, which means incase of default/ non-payment, assets can be liquidated to repay the debts. Credit rating agencies CARE and BWR has awarded highest credit ratings, suggesting lowest risk involved.  So, safety score is high for the principle amount.
Now let us look at the interest rate and coupon payment scenario. The #coupon rate across segment is expected to be just above 1.5- 2 % from any bank FDs at this point of time. Though the dematerialised NCDs don’t attract TDS, the investment will taxed at short term (less than a year) and long term (debt investment more than a year are taxed at 10%) depending on the holding period. The interest will be taxed as per the tax bracket of the investor. So, with a high tax bracket investor (20-30%) won’t be benefited much, as the return will be almost similar to Bank FDs.
However, interest rate movement can be a game changer in this investment. Apart from the coupon payment, capital appreciation on principal is possible incase interest rates soften during the tenure of the NCDs. The interest rate and bond prices move in opposite direction and one can sell it at a profit, instead of holding on till maturity. The scenario exactly can become opposite in case of rising interest environment, the prices of the instrument may fall sometimes even below the face value in some rare cases. For the investors in lower tax bracket, instrument offers higher interest rate than bank with minimum risk, may also enjoy capital appreciation incase interest rates fall.

General Risks –
  •         #DHFL’s Business is particularly vulnerable to volatility in interest rates
  •     Any increase in the levels of non-performing assets in loan portfolio, for any reason whatsoever, would adversely affect the business, results of operations and financial condition
  •     Any downgrade in their credit ratings may increase interest rates for refinancing their outstanding debt, which would increase their financing costs, and adversely affect our future issuances of debt and our ability to borrow on a competitive basis.


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