Shriram Transport Finance has come out with a public issue of non-convertible debentures (NCDs), offering an 11-11.5 per cent interest rate for individuals. Due to high investor interest, the issue is likely to close today, way ahead of the original close date of July 22. Investors can subscribe to this NCD to lock into higher fixed returns before the rate cycle starts to reverse over the next year.
For a minimum investment of ₹10,000, the company is offering both cumulative and non-cumulative options across all tenures.The three-year option offers 11 per cent interest, whereas the five-year and seven-year option offers 11.25 per cent and 11.5 per cent.
The issue has been rated AA/stable by CRISIL. This implies a high degree of safety regarding timely servicing of financial obligations and very low credit risk.
We recommend that investors consider the three-year cumulative option offering 11 per cent interest. Locking in your deposits for a longer term could entail interest rate risk, as it is difficult to second-guess how interest rates will pan out over the next five-seven years.
At 11 per cent for three years, the post-tax return for investors in the 10 per cent, 20 per cent and 30 per cent tax bracket works out to 9.8 per cent, 8.7 per cent and 7.6 per cent, respectively. Rates offered on this NCD compare favourably with other recent NCD issues. In its recent issue, Muthoot Finance offered 11.75 per cent interest on three-year NCDs. But the rating was a tad lower, at ICRA AA-/Stable. Similarly Srei Infrastructure offered 12 per cent, but with a lower rating of CARE AA-.
The interest rates offered by Shriram Transport Finance are also better than bank deposit rates, as well as interest rates of non-banking financing companies with a similar risk profile (CRISIL rating FAA or more). At present, banks offer 9 per cent interest on three-year deposits on average. The highest rate offered on deposits of this tenure is 9.25 per cent by banks such as Karur Vysya and Laxmi Vilas bank.
Nevertheless, remember that NCDs are not insured like fixed deposits (insurance available up to ₹1 lakh worth of deposits). The NCD of this company, however, is secured. This means that in case the company is liquidated, the NCD holders would be given priority in repayment of money due to them, as they are secured by a charge on any of the assets of the company. Besides, NCDs can be listed and traded on the stock exchanges, although liquidity may be thin. A downward movement in interest rates could lead to appreciation in the price of the NCDs, as interest and price are inversely proportional. But a sale in the stock market will attract short/long-term capital gains tax.
Shriram Transport Finance is one of the largest asset financing companies in India, strategically well-positioned in the pre-owned truck market. As of March 2014, the company has total assets under management of around ₹53,000 crore. The company has a market share of 25 per cent in this high yielding segment.
Owing to the economic slowdown, the company’s asset quality has been under pressure and its gross non-performing assets (GNPAs) stood at 3.9 per cent of loans, as against 3.2 per cent last year. In 2013-14, the company’s net profit declined by 7 per cent to ₹1,264 crore. Being a niche CV financier, the company will significantly benefit from the expected recovery in infrastructure, industrial and mining activity.
The issue size is ₹500 crore, with an option to retain over-subscription up to ₹3,000 crore. The issue opened on July 2.