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Power Finance Corporation - Tax Free Bonds 2012


Power Finance Corporation – Tax Free Bonds – Dec’12                                                  Subscribe

Power Finance Corporation is a “Navaratna” company of Government of India.  It is engaged in the business of lending and advisory services from project conceptualization to post commissioning for clients in the power sector.

Issue Details:
PFC is issuing “Tax Free Bonds” , which are secured, redeemable and non-convertible debentures to an extent of Rs1000 crores, with an option to retain up to Rs4,590 crores of oversubscription. 

Face Value
Rs1000 per Bond
Minimum Application
Rs 5000 or 5 Bonds
Interest Rate
7.69% for 10 years option
7.86% for 15 years option
Mode of Allotment
Dematerialised and Physical Form
Credit Rating
Crisil  - AAA; ICRA – AAA
Listing
Bombay Stock Exchange
Issue Open
14th Dec 2012
Issue Closes
21st Dec2012

Financial Details of PFC:
·         Existing profit making PSU – FY 2011-12 profits of Rs3031.74 crores
·         EPS – Rs23.41 for FY 2011-12
·         Loan Assets at Rs140,819.21 crores as of 30-Sep-2012
·         Consistent growth in loan assets and profits over the last 5 Financial Years

Tax Benefits:
·         Tax Free Bonds – Interest income fully exempt
·         No Wealth Tax applicable
·         Since it is a listed bond, benefits of indexation available in case of sale in stock exchanges

Investment Recommendation:
 The PFC tax free bonds are an attractive investment opportunity for resident individuals who are in the highest tax slab.  With the interest rate expected to move southward from 2013, the tax free rate of 7.69% for 10 years and 7.86% for 15 years is on the higher side. 

This issue has a highest credit rating from Crisil and ICRA indicating sound credit quality and prudent asset recognition norms, which lends a high degree of security to the investors. The listing of the shares on the stock exchanges provides an excellent window for exiting the investment if need arises in the future. 

On the downside, committing funds for a minimum period of 10 years is required.  There is a possibility of interest rates moving against the investor is there, though the chances of it are very low over the next 10 years.   The asset book is skewed towards power sector, which is going through a difficult phase all over India.  The State Electricity Boards which are one of the primary borrowers of PFC is in doldrums across many states in India.  Considering that there is a major reform process initiated in the power sector recently by the Central Government and most of the state electricity loans are guaranteed by the respective state governments, the possibility of default is limited.  But the risk is definitely there.

Verdict:
Considering the overall risk profile of PFC and its good performance over the last several years, we think it is an attractive opportunity to lock-in some money at the current rates.   This is a good quality debt instrument with add on benefits like tax free status, easy liquidity through stock exchange listing. 

Couple of caveats is that you should have exhausted your Provident Fund and Public Provident Fund contribution limits before you are looking at this.  Secondly, you should remain in the tax slab of 30% during the entire tenure of the investment.  That is, it may not be suitable for people who are going to retire in the next few years.

We recommend the investors to go for the ten year option.  Yes, NRIs can also invest in these bonds. 

If you need any assistance in investing in this Bond issue, please feel free to write to me at venkytuty@gmail.com or call me on +91 98415-67379.  

Disclaimer:
This is not an invitation to subscribe to the Tax free bond issue of PFC.  You should consult your personal financial advisor or take your own decision on this investment.  Please read the offer document completely before making any investment decision.

Disclosure:
The author may or may not be investing in this bond issue.  Also, if you decide to invest through us, we may be getting some commission from the product manufacturer. 

3 comments:

Gopal V said...

But will this be enough to beat inflation?

Instead will an investment into some kind of mutual fund (equity/index/debt) be helpful? Also I guess this is not eligible for any tax exemption (80C) isn't it?

Venkysdiary said...

@Gopal - Good question!

The importance of asset allocation comes into play. It is very important to have a good mix of debt and equity, and this tax-free bond can fill in the debt requirement.

Regarding your question on debt MF, yes, it is an option but sustainability of 7.8% post tax returns over a 10 year horizon may not be possible. We have seen interest rate cycles moving from 6% to 11% on corporate debt over the last 8 years. But this provides stability of returns.

On the question of taxation, there is no tax benefit under section 80C for these bonds.

Regards
Venkat

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