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Shriram City Union Finance - NCD Issue - Invest

Overview: 
Shriram City Union Finance, a non-banking Finance Company (NBFC) from the Chennai headquartered Shriram Group of Companies is launching a secured Non-Convertible Debenture from 12 Sep 2012.  Shriram City Union Finance plans to collect Rs250 crores with a green-shoe option of another Rs250 crores.  

The NCD has a 3 year and 5 year option investment option.  The coupon rate for the 3 year investment is 11.5% and the coupon rate for 5 years is 11.75%.  Please note these rates are applicable only for investments less than Rs5 lakhs under the Reserved Resident Individual Category.  The face value of every NCD is Rs1000 and investors can invest in multiples of Rs1000.  

Shriram City Union Finance is an existing profit making company engaged in the business of lending for consumer durables, two-wheelers and small businesses.  The business is concentrated in the four southern states and Maharashtra, which accounts for more than 65% of the branches.  The objective of the issue is to use the proceeds to repay existing loans, expand business and other routine business purposes.  The net interest margins made by Shriram City Union Finance are mouth-watering at more than 7%! 

Credit Rating:  
One of the important points to note in case of these long term debt instruments is how sound their business is.  This is known through the credit rating assigned by the various credit rating agencies employed by the issuer for this purpose.  

The NCD of Shriram City Union Finance has Crisil’s investment grade rating of AA-, which denotes "high degree of safety regarding timely financing of financial obligations".  

Mode of Holding: 
Please note, it is mandatory for all the applicants to apply for these NCDs only in the dematerialised form.  That is, you need a Demat account to apply for this issue.  


Investment Alternatives:
While making each and every investment it is very important to analyse what are the available alternatives.  In this case, the available alternatives are bank deposits and already existing NCDs from Shriram and other companies like Tata Capital, which are listed on the Stock Exchanges. 

Bank deposits currently don't offer similar returns for either 3 or 5 year deposits.  The only advantage they would provide is deposit insurance guarantee for a aggregate sum of Rs1 lakh for every investor.  

Looking at the other option of existing listed NCDs, there are few NCDs which are available at a little higher yield to maturity, like Tata Capital.  But the biggest problem in India is the lack of liquidity in debt segment of stock exchanges.  The average traded volumes are much lower in the region of Rs30 lakhs per day.  You may get a slightly better yield if you are able to pick up existing NCD's from the stock exchanges, but for a layman this would be a tough ask.  

Taxation:
All returns from NCDs are taxable under the "Income from Other Sources" head as per the Income Tax Act.   Therefore, the effective yields on the NCDs would be less compared to the coupon rate what has been mentioned above, depending on the tax slab you are in.  The issuer, Shriram City Union Finance, would not deduct tax at source (TDS) for the NCDs irrespective of the amount invested.  

Investment Recommendation: 
Considering the fact that the deposit rates are moving down and further expected to slide, I believe that this a good opportunity to lock a portion of your fixed income investments at an attractive interest rates. I would suggest that you may use this opportunity and apply for NCDs not exceeding 2% to 5% of your overall portfolio value. (For portfolio sizes which are bigger than Rs30 lakhs).  For others, you may go up to Rs50,000.   
  
As there are no put or call options in this issue, there is no threat of early redemption by the issuer.  


Hope you find this information useful and please do let me know if you require any help in applying for this NCD.   

Update on subscription status:
As of 14th Sept 2012, the issue has been subscribed 0.83 times, that is around Rs206crores out of the total issue size of Rs250 crores.  
Retail subscription less than Rs5 Lakhs - 1.92 times
All other categories have minuscule subcriptions  

Disclaimer:
Please note these are my personal views on this investment and I strongly urge you to check with your Personal Financial Planner before you decide on investing in this NCDs.  The views expressed here are my personal views and no way related to my current, past or future employers.  This post is not a solicitation to invest in Shriram City Union Finance NCDs.    

10 comments:

Venkatesh TK said...

somehow i am bit concerned about this group.. In nbfc space the best and stable one is sundaram finance. Shriram is aggresive but over leveraged is what i feel. Have you gone through their numbers?? they are frequently hitting market with some or other issues with their group companies..

Venkysdiary said...

Hi Venkatesh,
What you say is right. Sundaram is the conservative of the lot and Shriram is little aggressive and unlike the majority of the South Indian groups. Having said that, I have had a look at the numbers and it looks good for this particular company. They have gross NPA's of 1.35% or so and net NPAs much below that. Their Net Interest Margin is above 7%, which may not be sustainable in the long run. Regarding the Debt, as they are in to lending business, their debt-equity ratio would look high and if they have a good Asset Liability Management system, they should be able to carry on without any issue. Why Shriram group is repeatedly hitting the market? Because, in my opinion, the recent RBI regulations on lending to NBFCs by Banks is making them approach the general public for funds.

Having said all these things above, I would not still advise somebody to go above board and park huge amounts of money with these NBFCs. These NCDs should be used only to improve your overall Fixed Income yield without compromising on portfolio stability. Hence, I have suggested a maximum of Rs50K for portfolio less than Rs30 lakhs and anywhere between 2% to 5% for portfolio above that.

Anonymous said...

Venky, nice post.

What is ur take on market price on listing & resultant capital gains.

Venkysdiary said...

@Anonymous: This is a debt instrument, which is very different from an equity IPO, and as such I don't expect any listing gains!

You invest in NCDs for fixed returns primarily and not for listing gains. Hope this clarifies.

Nagarajan said...

We had IIFL offering 13% but that is not secured. I think there are few other NCDs in the pipeline as well. Last time around, I applied for 10 NCDs and got only 4 alloted in SCUF.So, I was not interested this time since there is no point in investing 3 or 4k even if the interest rates are high. I see Shriram NCDs are getting over subscribed.

I sought your advice on Muthoot earlier and I think it is doing well now. Again, I applied only for 10 and got that alloted.

Anonymous said...

Hi,
What is the taxability of these bonds, if one chooses cumulative option? Please note, there is no coupon rate, for cummulative option. There will only be lumpsum payment at the end of chosen period.
Thank you,

Venkysdiary said...

@Anon,
This is a very good question. I am giving below my understanding of the taxability of NCDs.

If you investing under the cumulative option and hold on the NCDs till maturity, the interest would be taxed as "income from other sources". That is, every year the interest needs to be offered to tax on an accrual basis.

The second part to the question, if the NCDs are sold mid-term or before maturity on the stock exchange:
In that case, the profit or loss would be taxed as Capital Gains. If it is held for less than 12 months it would be ST Capital Gains and more than 12 months, it would be LT CG.

Hope this clarifies and thanks for bringing up this important point.

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rajni sharma said...
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