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Investors in the higher tax-brackets can consider subscribing to the tax-free bond issue of Housing and Urban Development Corporation (HUDCO), which opens on January 9. Retail investors can invest up to Rs 10 lakh and will get 0.5 per cent more interest than other investors.
HUDCO’s offering is 0.12-0.13 per cent more than what REC offered to retail investors on bonds of similar tenure a few weeks ago. But the AA+ credit rating on HUDCO’s bonds is one notch lower compared with the AAA rating of the earlier issues. This means that HUDCO’s bonds are a little more risky. With regard to timely servicing of financial obligations, bonds with AAA rating are considered to have the highest degree of safety. Bonds with AA+ rating are considered to have a high degree of safety.
More risk
Marginally higher risk need not dissuade investors from considering investments in the HUDCO issue. For one, the bonds are secured and the company is Government-controlled. These factors impart comfort on the safety aspect. Next, better rates compensate for the higher risk.
Investors in high tax-brackets can benefit from the issue. Being tax-free, returns on the HUDCO bonds are better than what bank deposits give.
At the current best rate of 9.5 per cent, the after-tax return on a bank deposit compounded quarterly is 6.8 per cent for investors in the 30 per cent tax bracket and 7.82 per cent for those in the 20 per cent bracket. This is lower than the returns for retail investors on both the 10-year and 15-year bonds of HUDCO.
Investors may be better off subscribing now to HUDCO’s bonds as an interest rate cut by the RBI is in the offing. This may reduce rates which will be offered on future tax-free bonds.
But investments in tax-free bonds should be done after investing in instruments such as public provident fund (PPF). PPF offers better rates (8.8 per cent tax-free currently), which is further enhanced by tax deduction up to the maximum investment limit of Rs 1 lakh.
The HUDCO bonds will be listed on the National Stock Exchange (NSE). Gains made on sale will be subject to capital gains tax. The benefit of 0.5 per cent higher rate is applicable only to retail investors who are allotted the bonds originally at issue. Once the bonds are transferred or sold, the benefit is lost and rates will be the same as offered to other investor categories (7.34 per cent for the 10-year bond and 7.5 per cent for the 15-year bond).
company details
A mini-ratna Government company, HUDCO provides long-term finance for housing and urban infrastructure projects. The company’s loan book as on March 2012 was Rs 25,003 crore. HUDCO profits rose at an annual average rate of 14 per cent over the last four years to Rs 630 crore in FY-12.
As on March 2012, its capital adequacy ratio was comfortable at 31.37 per cent, and long-term debt to equity ratio was reasonable at 2.29 times. But net non-performing assets (NPA) was at 1.44 per cent, higher than that of earlier tax-free bond issuers. While HUDCO’s net NPA increased further to 4.66 per cent as on September 2012, capital adequacy improved to 34.8 per cent. The company expects NPA levels to moderate in the second half of the year.
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