NCD Issue - INDIA INFOLINE FINANCE

Introduction:

India Infoline Finance Limited, RBI-registered NBFC and 98.87% subsidiary of listed broker India Infoline, is entering the debt capital market for the second time, with a public issue of unsecured redeemable non-convertible debentures (NCDs) of face value Rs. 1,000 each, to raise Rs. 250 crore with an option to retain another Rs 250 crore, taking the total fund raising to Rs. 500 crore. 

Issue Details:

The issue opens on 5^th September (Wednesday) and closes on 18^th September 2012, with an option in company’s hands to either close the issue earlier or extend the closing. Minimum application amount is Rs 5,000, and in multiples of Rs, 1,000 thereof, with offer on first-cum-first serve basis.

Rating: ‘AA-/Stable’ by CRISIL and ICRA indicating high degree of safety for timely servicing of financial obligations

Listing: To be listed on NSE and BSE with one NCD comprising a trading lot. NCD would be issued both in physical and demat form, but can be traded on the exchanges only in the demat form. 

What’s on offer: The 6-year NCD issue has 3 investment options as under:

*Redemption amount at end of 6 years is Rs. 2,054.50 per NCD

Allocation Ratio: 50% issue reserved for resident individuals / HUFs – split equally between investment application upto Rs. 5 lakh and for investment application above Rs. 5 lakh. 40% of the issue reserved for institutions, while balance 10% for HNIs. 

Company Background:

The company is in mortgage loans and capital market finance (loan against shares, margin funding etc.), with mortgage loans accounted for 45% of its Rs. 6,746 crore loan book as of 31^st March 2012, while gold loans accounted for 41%, capital market finance 12% and balance 1% in health care finance.

For FY12, its consolidated income from operations was Rs. 908 crore with PAT at Rs. 105 crore. With a networth of Rs. 1,445 crore, as of 31st March 2012, company is highly leveraged with Rs. 5,938 crore debt, indicating debt-equity ratio of 4.1:1, up from 1.6:1 as of 31^st March 2011, when debt was Rs. 2,083 crore. The current fund-raising, to be used for company’s financing activities, will only aggregate the debt-equity ratio further.

Positives:

The 12.75% interest rate seems attractive for retail investment in fixed income securities, given the longer tenure of the instrument for 6 years, ensuring that capital is earning the premium rate. No bank is offering interest rates in double digit on fixed deposits of 5 years and above.

Concerns:

1. Unsecured nature of instrument, vis-à-vis secured NCDs being issued by other companies and also by this company last year
2. Business operations involving risky areas of capital market finance
3. Parentage

Previous NCD Issue:

Last August, the company, when it was then called India Infoline Investment Services, had raised Rs. 750 crore through secured NCDs at 11.70%-11.90% interest with 3-5 years tenure. In comparison with the year-ago issue, the current rates being offered are quite attractive, as the current NCDs are unsecured, while last year secured NCDs were issued. These previously-issued NCDs (secured) are currently trading on NSE with yields of about 11.70% to 12% per annum.

Conclusion:

Ahead of RBI’s policy review on 17th September, many NBFCs, having received SEBI nod, are likely to announce public issue of secured NCDs in the coming fortnight – to name a few Religare Finvest, Muthoot Finance, Shriram City Union for Rs 500 crore each and SREI Infrastructure Finance for Rs 150 crore.

NCDs of other companies which are currently listed, such as SBI and Shriram Transport Finance, provide greater comfort as they came from larger and more-respected corporates, in addition to being secured instruments. Secured 5-year NCDs of Shriram Transport Finance, issued just last month, are currently trading at yields of 11.5% to 11.8% per annuam on the NSE.

Recommendation:

Option 1 with monthly interest outgo of 12.75% per annum, leading to an annual effective yield of 13.52% is an attractive proposition for those willing to park funds in the fixed income market. This can be termed as the ‘small-cap’ of debt market.

For HNIs and large investors falling in the maximum tax bracket, as also, looking at the current yields on tax free bonds, available in the secondary market and unsecured nature of the NCDs from India Infoline, yield looks moderate. Considering all this, put a small amount in this and wait for other better instruments from a little safer and large issuers.