Business Line
M. V. S. Santosh Kumar
The five-year secured non-convertible debentures (NCDs) offered by Tata Capital, a non-banking finance subsidiary of Tata Sons Ltd., may be a good investment option. The NCDs, with interest rates of 11-12 per cent under four options, offer superior returns compared to bank fixed deposits, though they are riskier. Interest rates on five-year bank deposits now range between 8.25 per cent and 10.25 per cent.
Investors should evaluate the NCDs in the light of the fact that they allow locking into an attractive yield of 12 per cent for a five-year period (assuming the put/call options are not exercised), even as returns on most other fixed-income options are set to decline sharply.
The risks linked with the offer stem from the challenges associated with the NBFC business and the relatively short track record of Tata Capital. However, this credit risk is partly mitigated by the security offered (fixed assets and future receivables) and the proposal to create a debenture redemption reserve towards maturity. The offer is rated LAA+ by ICRA, which is among the higher investment grade ratings.
Options: Those who wish to invest in these debentures will have four options to choose from based on the periodicity of payments and the minimum amount they can invest.
Of all the options, the cumulative option appears most attractive, as it allows investors to reinvest the interest proceeds at high coupon rates of 12 per cent. This instrument is shielded from the interest rate and re-investment risks. For Rs 10,000 invested today, a cumulative amount of Rs 17623 pre-tax can be earned at the end of five years.
Investors who expect monthly, quarterly or yearly returns are advised to look at other options.
However, yields will be lower depending on where investors re-invest their interest receipts. Assuming an investor re-invests his interest receipts at 6 per cent (the prevailing risk-free rate), the yields will work out to 10.39 per cent, 10.53 per cent and 10.88 per cent respectively on monthly, quarterly and annual payout options.
Liquidity: Though the cumulative scheme is a lock-in scheme, investors have a put option at the end of 36 months to redeem their investments, without any interest rate penalty.
The NCDs are also proposed to be listed and traded on the NSE and investors may have the option of cashing out earlier, if the bonds witness frequent trading in sufficient volumes. Tax deduction on the NCDs will be on the interest paid and based on the income slab investor is in.
TCL intends 100 per cent allotment for investors who put in less than Rs 1 lakh. Even if the issue gets oversubscribed, preference will be given to the retail investors over other non-institutional investors (HNIs), institutions and QIPs
Business
TCL is a non-deposit-taking NBFC. Along with its subsidiaries (few subsidiaries are yet to start operations), it offers various financial services including infrastructure lending, SME lending, factoring, bill discounting, auto financing, home financing, advisory, broking, investment banking , private equity and wealth management.
As of September 30, 2008, TCL had an advance book size of Rs 6,827 crore. Eighty one per cent of the loans are secured in nature. The advances book is divided into a retail book (40 per cent), small and medium enterprises (30 per cent) and infrastructure financing (30 per cent). In the recent past, much of the growth in advances was contributed by the retail advances.
Though concerns have been raised about the possibility of higher retail delinquencies, Tata Capital’s relatively recent foray into lending may have shielded it from such risks. Its net NPA as a proportion of advances was at 0.5 per cent by September 2008. Though Tata Capital managed a marginal net profit in the first six months ended September 2008, it reported a pre-tax loss of about Rs 18 crore for the nine months ended December, 2008. But with the businesses in a nascent stage, it is too early to comment on the business as most of the costs are start-up costs.
The capital adequacy of the NBFC is 26 per cent (against the stipulated 10 per cent right now and 12 per cent after March 31, 2009) and the debt-equity ratio pre-issue is at a comfortable 2.6 (3.3 post issue if the entire NCD offer of Rs 1500 crore is subscribed). High capital adequacy and low debt-equity leave more room for leveraging
Risks
The company is a relatively new one, set up in May 8, 2007. As the company is a late entrant in the financial sector space and is venturing into various businesses at the same time, it has a limited track record by which to judge its success.
While all the businesses the company has entered into face a slow down, the government’s stimulus package for infrastructure companies and SMEs and the special financing facilities offered to NBFCs may partially benefit the business in the coming quarters. As far as lending is concerned, Tata Capital’s plans to tap into the Tata group’s vendors and distributors (not group companies), may offer a ready client base.
Offer Details
Tata Capital expects to raise a minimum amount of Rs 500 crore under this offer, with the option of retaining an additional Rs 1,000 crore. The issue is already open (was launched on February 02, 2009) and closes on February 24.
However, the issue may be closed earlier if the company manages to raise the maximum amount. Proceeds from this issue will be used for activities such as financing, investments, growth of the operations and to partly retire high-cost funds raised earlier.
The issue will be in de-materialised mode and listed in the NSE corporate bond market. NCD holders can even trade in these debentures in the secondary market; there is liquidity risk for premature encashment as the bond market is relatively illiquid.
TO SUBCRIBE CONTACT VINODKUMAR CFP 9842292339
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