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Invest in Piramal Capital NCDs only if you can take some risk

Maulik Madhu BL Research Bureau | Updated on July 11, 2021

Takeover of DHFL could impact the loan book quality and capital adequacy of combined entity

Piramal Capital & Housing Finance (PCHFL), a non-deposit taking housing finance company from the Piramal Group, is coming out with a secured NCD (non-convertible debentures) issue of ₹200 crore with an option to retain oversubscription of up to ₹800 crore. The offer is open during July 12-23, 2021. This is the first tranche of the ₹2,000 crore proposed to be raised by the home financier.

What’s on offer

There are five series, I to V, with tenures of 26, 36, 60 and 120 months offering a fixed rate of interest. Except for series II, which is a cumulative option, all other series come with an annual interest (coupon) pay-out option. Series II offers a yield of 8.35 per cent for a 26-month NCD. The other four non-cumulative series offer 8.35 per cent to 9.00 per cent per annum coupon pay-out for 26 to 120-month tenure NCDs.

 

While the coupons offered are attractive, especially given the current low interest rates, they likely reflect the higher risk. PCHFL is taking over the stressed mortgage lender, Dewan Housing Finance Corporation (DHFL) with the risk of this impacting the loan book quality and capital adequacy of the combined entity.

The NCDs have been rated CARE AA (CWD) that is, under credit watch with developing implications by CARE Ratings and [ICRA] AA (Outlook: Negative) by ICRA. This is lower than the AAA rating assigned to debt papers with the highest degree of safety. A negative outlook indicates the possibility of a ratings downgrade. Investors who care most for capital safety are better off investing a portion of their debt allocation in AAA-rated secured NCDs.

Up to 40 per cent of the tranche I issue has been reserved for retail investors to be allotted on ‘first come, first served’ basis. Investors must apply for a minimum of 10 NCDs (₹10,000) that can be split across the five series and in multiples of 1 NCD (₹1,000).

About issuer

PCHFL is a 100 per cent subsidiary of Piramal Enterprises. It provides wholesale funding (bulk of the loan book) to real estate developers, corporates and SMEs across sectors and retail funding, including housing finance to individuals. PCHFL had a loan book of ₹32,354 crore and net NPAs (non-performing assets) of 1.90 per cent as of March 31, 2021. Real estate lending contributed over three-fourths of the housing finance company’s loan book.

Non-real estate corporate finance accounted for 7.1 per cent and retail lending 13.7 per cent.

Between FY19 and FY21, PCHFL reported a 4 per cent fall in operational income to ₹5,082 crore and 15.3 per cent decline in net profit to ₹1,034 crore. PCHFL is, however, well-capitalised with a capital to risk weighted assets ratio (CRAR) of 32.30 per cent as on March 31, 2021, well above the mandated 15 per cent limit.

Last month, the National Company Law Tribunal approved the takeover of (DHFL) by PCHFL for a consideration of ₹34,250 crore. The merger of PCHFL with DHFL, once completed, will help the former expand its retail loan portfolio and improve its wholesale-retail loan mix. It will also benefit from DHFL’s existing branch network. However, investors need to watch out for the risk of DHFL’s loan book lowering the asset quality of the merged entity as also impinging on the currently high capital adequacy ratio. As of March 31, 2020, DHFL had a loan book of ₹66,203 crore and negative net-worth of ₹5,538 crore.

Interest received on the NCDs will be taxed at your income tax slab rate. NCDs bought in the issue and held till maturity (both at face value) will result in no capital gains and so no tax. In all other cases, any capital gains will be taxed. According to Archit Gupta, Founder and CEO, ClearTax, if the NCDs are sold after being held for up to 12 months, short-term capital gains, if any, will be taxed at your slab rate. If the NCDs are sold beyond that, long-term capital gains tax at 10 per cent without indexation plus education and higher education cess of 4 per cent will apply.

Other options

Those wary of taking on too much risk can choose from the relatively safer AAA-rated bonds. For instance, as per HDFC Securities data, Tata Capital Financial Services bonds (series - 845TCFS22 Individual) with a residual maturity of 1.15 years are available on the secondary market at a yield-to-maturity (YTM) of 7.10 per cent. The YTM indicates your overall return (CAGR) assuming you buy the bonds today and hold them until maturity. A notch lower, the AA+ Shriram Transport Finance Company bonds (series - STFC YK Individual) with a residual maturity of 2.03 years are available at a YTM of 7.77 per cent.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

Published on July 10, 2021

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