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Bank fixed deposit rates are not having their best run, and for fixed-income investors who can take some risk to earn higher returns, it’s raining options. NCD (non-convertible debenture) issues of three companies — L&T Finance, Shriram City Union and Magma Fin Corp — are open for subscription now. All three companies are offering secured, redeemable NCDs for tenures of 2-10 years. Of the three, L&T Finance offers a good risk-return proposition for investors.
Go for L&T Finance
L&T Finance’s NCDs are available for three, five and eight years. The interest rates for retail investors vary from 8.66 per cent to 9.05 per cent depending on the tenure as well as the mode and frequency of interest payment (see table). While the three- and five-year NCDs have a cumulative interest option, the eight-year NCD does not.
The minimum application across all series is ₹10,000 (10 NCDs of face value of ₹1,000 each). The offer is rated AAA by ICRA, CARE and India Ratings, denoting the highest degree of safety on timely servicing of financial obligations and the lowest credit risk. It is in this aspect that L&T Finance scores over the other two companies.
Shriram City Union’s credit ratings are lower than L&T Finance at AA+ by CARE and AA by CRISIL. Magma Fincorp, too, scores lower, being rated AA by rating agencies Brickworks and Acuite. Thus, while the superior returns offered across tenures for these companies (see table) look attractive, the risk attached is also more. These may be suitable only for investors with a high risk appetite.
Choose three-year cumulative option
Investors can consider the three-year cumulative option in L&T Finance that offers 8.9 per cent. An interest pay-out option is also available for the three-year NCD, but it provides only an annual pay-out and may not make sense for investors looking for regular monthly income. By investing in the cumulative option instead, investors can get the benefit of compounding.
With the RBI cutting rates for the second time in a row in its Monetary Policy announcement last week, the upside to deposit rates remain muted. Rates can be expected to be benign in the near to medium term. Already, the rate offered in this tranche is lower than the earlier issue in March 2019. L&T Finance had offered 8.89-9.35 per cent across various tenures then. In this scenario, a three-year time-frame will enable investors to lock into higher rates now, while, at the same time, giving room for reinvestment elsewhere at a higher interest if the rate cycle changes three years down the line. For the same reason, the five-year cumulative option — which offers only about 10 basis points higher rate at 9 per cent but entails a lock-in of an additional two years — seems less ideal.
The 8.9 per cent offered by the three-year NCD is superior to comparable NBFC fixed deposits. AAA rated NBFCs such as Bajaj Finance, LIC Housing Finance, PNB Housing Finance and M&M Financial Services offer 8.25-8.8 per cent for a three-year term. Private and public sector bank interest rates for three-year deposits stand at 6.5-8.25 per cent at present. Some small finance banks such as Fincare, Jana and Suryoday offer 9 per cent returns on three-year deposits. Thus, this NCD will be a good diversifier to your fixed-income portfolio.
The NCDs will be listed on the BSE and the NSE. Hence, you can sell it on the stock exchange before the end of the tenure. However, liquidity may be low. The interest income on the NCD will be taxable at slab rates, while the sale of the NCD in the stock market will attract long/short-term capital gains tax.
About the company
L&T Finance scores reasonably well on financial parameters. The October-December quarter saw its assets under management increase 22 per cent year-on-year to ₹94,711 crore. With the company focussing more on lower-risk retail lending, retail loans (rural and housing) at the end of the December 2018 quarter constituted 50 per cent of the total, compared with 41 per cent a year ago. Its gross NPAs have come down to 6.74 per cent as of December 2018 from 10.4 per cent a year ago, while net NPAs have reduced to 2.64 per cent from 4.74 per cent. It is well-placed on the liquidity front, too.
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