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Sowmya Krishnan

KRISHNA Bhagya Jala Nigam (KBJNL), an infrastructure company wholly owned by the Karnataka Government, has floated secured redeemable non-convertible bonds offer aggregating to Rs 350 crore. These have a face value of Rs 5,000. The seven-year bond offers a coupon of 11.70 per cent per annum with a call or put option at the end of five years. The yield to maturity is 11.70 per cent.

Recommendation: The returns offered are attractive, considering that a normal five-year fixed deposit in a bank would yield approximately 8.5 per cent. A fixed deposit in a manufacturing or finance company would, at the maximum, yield 11.5 per cent for a three-year deposit. A risk premium of around three per cent over a bank deposit appears fairly attractive given that the company has not defaulted payments on any of its earlier similar issues. Comparatively, the returns offered by KBJNL are attractive on a risk-adjusted scale. Since the Karnataka Government guarantees the interest and principal payment, the primary concern is the Government's servicing capacity.

Considering the State government's not-so-good financial position and the company's inability to generate adequate cash flows to service the debt, an investor willing to take some risk could consider this bond for investment. However, exposure can be restricted to a small portion of total funds available in one's kitty. The regular return bond issued by KBJNL is not eligible for tax benefits either under Section 80 L or under Section 88 of the Income-Tax Act, 1961. Thus, in terms of tax benefits, these bonds stand at par with those issued by private companies.

Risks: The company is not likely to make profits during the currency of the bonds offered and, hence, does not have any repayment capacity of its own. The Karnataka Government has unconditionally and irrevocably guaranteed the payment of interest and principal on the bonds. Interest and principal amount would be financed through budgetary support provided by the State government. Hence, the primary concern is the latter's financial position.

At present, the State government finances are precarious. Rising interest costs and debt have cast a shadow on its financial position. According to a report on the revenue receipts of the State, debts amounted to 14-17 per cent of the gross State Domestic Product (GSDP). The increasing ratio of debt to GSDP indicated reduction in Government's ability to meet its debt obligations.

Interest payments consumed 14 per cent of the revenue expenditure and there was 98 per cent increase in interest payments during 2000-01,compared to 1996-97.

The increase in interest payments alone constituted 47 per cent of the increase in expenditure under general services during 196-2001.

These statistics do not provide a positive outlook about the State government's ability to serve interest payments.

The estimated cost of the project as per the previous public issue was put at Rs 5,760 crore, but has escalated to Rs 8,271.55 crore.

Moreover, the project was expected to be completed by 2000 but has been delayed by three years due to litigations pending in the court and increased land acquisition costs.

As per the revised schedule of implementation, the project is to be completed by June 2003. Any delay would further escalate the costs and increase borrowings.

The cost is proposed to be part financed by market borrowings. This could further raise the interest payment obligations.

However, the company has been prompt in payment of interest or principal on due date so far.

The interest on market borrowings till 2004 comes as equity from the State government. After that, payment of interest would be supported by budgetary support.

Purpose: The funds raised are to be utilised for the execution of the Upper Krishna Project, a green field non-profit venture and a developmental project expected to be completed in 2003.

Issue details: The issue is open from March 27 to April 22, 2002. Face value of the bond offer is Rs 5,000. Minimum investment is one bond of Rs 5,000.

The interest rate is 11.70 per cent, and is payable annually. The tenor is seven, while the yield to maturity is 11.70 per cent. The put/call option is after five years.

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