Rates on this NCD are not matched by bank FDs, NBFC or company deposits currently.
BOND WATCH, NCD, SHRIRAM TRANSPORT FINANCE, GOOD INVESTMENT OPTIONS:
If you are looking for good investment options among fixed income instruments, a portion of your money can be parked in the latest secured non-convertible debenture issue from Shriram Transport Finance. For time periods of 36, 60 and 84 months (i.e., 3,5, and 7 years), the company is offering an interest rate of 11.25, 11.5 and 11.75 per cent respectively for individual investors. These rates are matched neither by bank fixed deposits nor NBFC/company deposits at the moment.
HOW IT COMPARES
The rates offered appear quite competitive on a few parameters. For one, it takes into account the upward move in the yield on 10-year gilt securities since the company’s first NCD offer in mid-July. Compared to its earlier issue, rates are higher by about 35 basis points. In this period, 10-year gilt yields have approximately moved up by a percentage point to 8.6 per cent now.
Secondly, rates are higher than what bank, company and NBFC deposits are offering currently. Bank deposits of 3 to 5 years offer only about 9-9.5 per cent interest rates. Among non-banks, Shriram Transport itself offers 10.75 per cent on its deposits (rated AA +) on three and five-year terms. For a higher AAA credit rating, M&M Financial offers slightly lower rates than Shriram Transport.
However, rates on the NCD are lower than recent issues such as those from SREI Infrastructure Finance, Muthoot Finance and IIFL. But this must be seen in the light of their credit ratings. Shriram Transport’s issue has been rated AA\Stable by CRISIL, while all the others have been rated at least a notch lower by various agencies.
THREE-YEAR OPTION IDEAL
Investors can choose the three-year option offering 11.25 per cent returns. In the 10-, 20- and 30-per cent tax brackets, the post-tax returns work out to 10.1, 8.9 and 7.8 per cent respectively.
Choose the non-cumulative option if you need regular income flows. Interest here is paid out annually. Interest on the non-cumulative option is compounded annually and paid out on maturity along with the principal.
Those with a slightly higher risk appetite can go for the five-year option. The stringent asset classification norms by RBI may impact the provisioning cost for the company. Currently, the loans for which instalments are overdue for 180 days or more are classified as non-performing. The proposal is to bring it down to 90 days (by end of 2014-15) for NBFCs in a phased manner. If these recommendations are accepted, the company may see higher delinquencies and hence higher provisioning costs.
TAX-FREE BONDS OR NCD
If you have a perspective of more than five years, tax-free bonds that are flooding the market now may be a better choice, especially if you are in the highest tax bracket of 30 per cent. The one from IIFCL, which is currently open, offers 8.26 per cent on 10-year bonds. Post-tax returns on the seven-year option from Shriram Transport will be marginally lower than this for someone in the 30 per cent tax bracket.
ISSUE DETAILS
The offer opens on October 7 and will be on till October 21. The minimum application amount is Rs 10,000. Investors are eligible to receive NCDs in physical mode if they choose to. The issue will be listed in the NSE and BSE. A downward movement in interest rates could lead to an appreciation in the value of the NCD.
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