There may be a pause in rate cuts for now, but interest rates are on a downward trajectory. Fixed income investments with good yields are increasingly hard to come by.

Given this backdrop, investments can be considered in non-convertible debenture (NCD) issue of Shriram Transport Finance.

The company is offering cumulative and non-cumulative options on its NCDs.

It carries interest rates of 10.25 per cent (3-year) and 10.5 per cent (5-year). Retail investors (investments of less than Rs 5 lakh) will get additional 0.9 percentage points.

We recommend the three-year cumulative option for retail investors. The interest rate on this option works out to 11.15 per cent. The post-tax return for investors in the 10 per cent, 20 per cent and 30 per cent tax bracket works out to 10 per cent, 8.9 per cent and 7.7 per cent, respectively.

Longer-term options (five years) can be refrained as investors, especially in the higher tax bracket, may get more attractive instruments in the form of tax-free instruments (which are expected to hit the market in the coming months). These instruments will provide similar return at a lower risk.

Attractive returns

The NCD rates offered by Shriram Transport are better than bank deposit rates. Banks, on an average, offer interest rates of around 9.25 per cent for a three year deposit.

The maximum rate is 9.75 per cent. But being covered by deposit insurance upto Rs 1 lakh, they do carry lower risk.

However, the interest rates offered by Shriram Transport are better than deposit rates of non-banking financing companies with similar risk profile. Rates offered by Dewan Housing Finance, Mahindra Finance and Sundaram Finance for a three-year cumulative deposits are in the range of 9.8 per cent and 10.8 per cent.

While investors can exit these instruments through secondary market, they can be subjected to liquidity risk. Investors looking for steady cash flows from these instruments can opt for non-cumulative option.

Considering that NCDs are not insured like deposits, if you have invested in past NCD issuances, limit the NCD exposure to about 20 per cent of your debt portfolio.

Asset financier

Shriram Transport Finance is the largest asset financing company in India with assets under management of more than Rs 40,000 crore. It is a major player in the pre-owned truck market.

The net profit as of March 2012 was Rs 1,257 crore and net non-performing asset ratio was 0.44 per cent. The capital adequacy ratio is at 22.6 per cent as against the mandated 15 per cent.

It is noteworthy that the RBI is expected to come up with stringent norms for NBFCs in the coming months.

This will strengthen the balance sheets of NBFCs like Shriram Transport Finance and will therefore benefit bond holders.

The company has a CRISIL AA rating which implies high degree of safety regarding timely servicing of financial obligations. The current outlook of the ratings also is stable which indicates lower possibility of ratings downgrade in the near future.

Issue details

The issue size is Rs 300 crore with an option to retain an additional Rs 300 crore. The issue opened on July 26 and closes on August 10, 2012. The offer is on a first-come first-served basis.

mvssantosh@thehindu.co.in

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