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

Investing in corporate bonds – A good debt investment option available for Indian investors

Debt Secondary market remains an unexplored category for Indian investors, though it is very popular globally. This post attempts to highlight few basics about bond investments
Fixed income like #Bonds, #NCDs remains least talked about subject, amongst the indian individual investors. Investors can invest in the primary market and stay put till maturity, as well as trade like equity/ shares. Infact, news reports indicates, bonds have yielded higher return compare to #Nifty or sensex in last one year.  There are two types of bonds traded in the debt market, Government securities (G-sec) and corporate bonds (Tax free bonds, NCD etc). G-Sec are considered to be the safest option with maturity ranging from 91 days (ultra short term) to 30 years (long term).
Corporate bonds are issued by banks, NBFC and corporates involve higher risks compared to G-secs, however they offer higher return comparatively.
When we talk about debt instruments (bonds, NCDs, CDs etc.) we come across terms like coupon rate, annual yield, yield to maturity etc. Let’s understand what is yield and how it is related to coupon rate and bond prices. Yield is annual return on the investment indicating in percentage term.

Analysing Bond investments in two scenarios – 1. Primary market 2. Secondary market. 

Primary market clearly defines that investors enter when the issue opens by the corporate.
For Example – In Primary market, a bond issued with face value – 100, Coupon rate 10%, minimum investment of 10 bonds, chosing annual payout option, Tenor 10 Years . Here the market value of the bonds will remain at Rs. 100 till the maturity. The yield to maturity(YTM) will be 10% = coupon rate since market value is the same as face value. Final payout will be bond price + interest accrued.

Secondary market –  Apart from the new bond issues, there are existing bonds in the market with higher yield, which investors can look at, but one need to understand that the two markets work differently and yield may vary significantly.The secondary market signifies trading in the already listed bonds.
Yield to maturity for secondary market investors – Case 1 – Bond traded at discount
Once the bond is listed on the exchanges, the bond prices fluctuate depending on the asking prices and volumes on the said trading day. The asking price of a bond move based on demand, supply and interest rate cycle. However, future payouts are pre-determined. Suppose, a bond is issued at a face value of Rs.100/-, with a coupon rate of 10% yearly, somebody invests Rs. 10,000 in the issue, the yearly interest payout remains at Rs. 1000 for the rest of the tenure. Incase, the bond prices fall to Rs. 90, still the coupon payout will be Rs. 10. So, now the same bond will be available at 9000 Rs. And, will still be able to fetch annual return of Rs. 1000, as the coupon payments on the bonds remain the same, so the annual return (or annual yield) is 11.1%.
In this scenario, the current bond price<issue price. Hence, it can be called as “discount”. One, who is investing in this situation, will get higher coupon pay out, i.e. higher yield. It may happen in the higher interest rate cycle, (the interest rate moves upward).   

Yield to maturity for secondary market investors – Case 2 – Bond traded at premium
In exactly opposite scenario, if the interest rates fall post the bond issue, the interest of the buyers increases the exiting bonds available in the secondary market, as they offer higher coupon rate, however, the buyer may need to pay premium as the askprice of the existing bonds with higher coupon rate move upwards due to increased demand. Now, if the bond price increases to Rs. 110, for 10,000 investment, coupon payout remains at 1000, and on the current NAV, the value of the investment will be 100*110 = 11000. This is a win-win situation for the primary market investor. However, in the secondary market, the coupon pay-out remains at Rs. 1000, against the bond price of Rs. 110. Hence the new investor is getting 9.09% interest pay-out, lesser than the coupon offered in the issue. If current bond price> issue price, it is said the bonds are sold at premium
Incase, there is no change in the ask price than the issue price, it is known as at par value(face value).

In the secondary market, yield-to-maturity includes coupon payment and the additional gain (bought at discount) or loss (if bought at a premium).

The points to be noted –
1. During the rising interest rate environment, investors can take advantage of the discount on the bond price, and enjoy the high yield as the coupon payout (interest payment) remains the same on lower cost of investment.
2. During the falling interest rate regime, the early investors can look at entering existing bonds with high yield option to capture a good yield, it may attract premium.
3. The liquidity in the instrument in the secondary market plays an important role. Size of the issue, investor interest, maturity date etc plays important role in the volumes. If the volumes are not adequate, one may need to wait or pay a premium.   
4. In secondary market, the bonds carry risks on interest rate,liquidity, credit and market risks
For trading in bond market you need to have a demat account. Please contact your share broker.  
You may check Investing answers YTM calculator to find approximate yield to maturity when you buy on secondary market.

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.


What is NCD and what makes it so attractive as an investment instrument

What is NCD and what makes it so attractive

NCD is a fixed income instrument Apart from taking bank loans Corporates, NBFCs raise money through issuing debentures. It is a financial instrument issued by corporates to support their business needs. There are two type of debentures, convertible debentures and non-convertible debenture. Convertible debentures are unsecured bonds and can be converted into equities or stocks at a future date as specified by the issuer.

NCD is financial instrument used for taking loan from the financial market. It cannot be converted into equity shares of the issuer in a future date, hence it offers higher interest rate. The NCD offers atleast 1.5 – 2% higher interest than any fixed deposit by a reputed bank and company deposits. NCDs come in both secured and unsecure form, secured #NCDs are backed by assets. Unsecured NCDs entails higher risk.

Added Edge
1. What makes it more attractive is, in the falling interest regime, the bond prices may surge, hence the value of the funds.
2. No TDS deducted on the demat form of investment (physical form does)

Points for the new investors
1. Once you come to know about a new NCD offer, check with your stock broker for online application.
2. Like any other IPO, it has a NCD comes with opening and closing dates
3. NCD offers coupon rate. Coupon rate is the interest rate paid on a bond by its issuer for the term of the security. For example, if a NCD issue comes with a face value of Rs. 100 and coupon rate 10%, the interest earned will be Rs. 10 per annum. However, in the tenure if the NAV price falls or surge, it will have no impact on the interest pay out, it will continue as Rs. 10 per year throughout the tenure. Hence, coupon rate is fixed on the offer price and continue through maturity 
4. Check for the credit rating allotted by #ICRA, #CRISIL, #CARE (triple A rating Suggest good financial health of the issuer, double A may give higher coupon rate, triple A ensures safety of your capital)
5. NCDs are also traded on stock exchanges. Apart from the new offers, investors can also buy exiting NCDs through stock exchanges, however, one need to be double careful and seek guidance from financial planner.  
6. Interests are generally paid through direct credit, RTGS, ECS and NEFT mode. It may offer monthly/ quarterly/ annually/ cumulative options.
7. Tax – The investment is 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.
8. This is as liquid as a bank fixed deposit. However, there is no penalty fee for pre-mature withdrawal of this investment
9. Additional Features – Some NCD public issues offer special rate of interest to Senior citizens or to shareholder.

Pros

1. It’s #liquidity is as good as any fixed deposit in bank, which has a specific tenure but can be withdrawn any time. However, FD may charge a penalty fee on interest accrued.. but incase of NCD, there is no penalty.
2. If it is compared with company fixed deposit, company deposits (a popular instrument in the senior citizen segment with 0.25- 0.50% extra interest)comes with various conditions for pre-mature withdrawal, for eg – lock-in periods, penalties etc.
3. NCDs come with Rating from #ICRA #CRISIL #IndiaRatings #CARE which gives a clarity to the investor on the risk involved, higher the rating, lower is the risk (AAA being the highest category, followed by AA, A, A-, BBB and so on)
4. Incase of bankruptcy, NCD holders get preference over shareholders

Cons
1. Incase interest rate increase, the value of the NCD may fall, sometimes even below the Face Value.

2. Though, the instrument can be traded on the exchanges, one may not find a buyer for NCDs if the trade volumes on bourses are low.

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