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Sowmya Sundar

OPTIONS for fixed deposits have been declining over the past couple of years. A handful of companies that continue to accept deposits offer only lower returns. So, it has become necessary for investors to include slightly riskier companies in the fixed income portfolio to enhance returns.

The fixed deposit programme of Escorts may be one such that offers high returns but at an elevated level of risk. Though currently a loss-making company, one can go in for deposits for up to two years due to the emerging scenario for the agricultural and farm equipment business, thanks largely to the government's thrust on agriculture, better outlook for tractor sales and the company's conscious effort to reduce inventory levels at the dealer-level. The narrowing of the difference between dealer-level and retail sales, in turn, reduces the finance costs involved in maintaining a high inventory levels. Though Escorts may continue to remain in the red this year, the risk of a default is limited.

In our previous appraisal, we had recommended an investment for one year only. We now enhance it to two years as the chances of improvement in the operating profits appear brighter due to better business conditions. Moreover, to bolster overall returns, one has to go in for a slightly riskier portfolio.

Though inflation has been rising, there is no significant indication of an interest rate hike in the near term. Any increase should be in the 50-100 basis points range over a year. Considering the overall scenario, a yield of 9.74 per cent for a two-year tenure appears attractive. The risks are higher compared to other companies that accept deposits, but investors will be adequately rewarded as the interest rate offered on the deposit is at least two percentage points higher than the safer options.

Escorts offers cumulative and non-cumulative schemes with the same rates. Since the interest is compounded at quarterly rests (see table for rates) for the cumulative scheme, the effective yields for the same are 8.77 per cent for one year, 9.74 per cent for two years and 10.84 per cent for three years.

Under the non-cumulative scheme, the interest is payable at quarterly intervals. Further details can be had from the company's registered office at 11, Scindia House, Connaught Circus, New Delhi - 110 001.

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