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 with a public issue of secured redeemable non-convertible debentures (NCDs) of face value Rs. 1,000 each, to raise Rs. 525 crore with an option to retain another Rs. 525 crore, taking the total fund raising to Rs. 1,050 crore.
Issue Details:
The issue opens on 17th September (Tuesday) and closes on 4th October 2013, 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’ by CARE and Brickwork (higher rating compared to issue made last year, although rating agencies differt) 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 for resident investor and only in demat form to non-residents. Trading is necessarily in the demat form on the exchanges.
What’s on offer: The NCD issue has 4 investment options as under:
| Particulars | Series I | Series II | Series III | Series IV |
| Frequency of interest payment | Monthly | Annual | Monthly | Annual |
| Tenure | 3 years | 3 years | 5 years | 5 years |
| Coupon Rate (% pa) | 12.00% | 12.00% | 12.00% | 12.00% |
| Effective Yield (% pa) | 12.68% | 12.00% | 12.68% | 12.00% |
Company Background:
The company is an NBFC undertaking mortgage loans, gold loans and capital market finance (loan against shares, margin funding etc.), with mortgage and gold loans accounted for 41% each of its Rs. 9,375 crore loan book as of 31st March 2013, while capital market finance accounting for 14%, and balance 3% by health care and 1% by vehicle finance.
For FY13, its earned interest income of Rs. 1,641 crore, up 85% YoY from Rs. 888 crore with PAT at Rs. 189 crore, up 80% YoY. However, this growth is coming at the cost of highly leveraged balance sheet. With AUM of Rs. 9,296 crore and a networth of Rs. 1,545 crore, as of 31st March 2013, company had total debt of Rs. 9,227 crore, indicating debt-equity ratio of 6:1, up from 1.6:1 as of 31st March 2011 and 4:1 as of 31st March 2012. Company has short term borrowings of Rs. 3,450 crore and current maturities of long term borrowings of Rs. 1,440 crore. Thus, Rs. 4,900 crore is up for repayment in the next 12 months.
Although its net NPAs are low at 0.17%, down from 0.40% as of 31st March 2012, one must not ignore the fact that the current fund-raising, aimed to meet company’s financing activities, loan repayment and working capital needs, will only worsen the debt-equity ratio further to 6.65:1.
Rate of Return:
The 12.68% yield on monthly interest payment in Series III (5 years) may seem attractive for retail investment in fixed income securities, given the longer tenure of the instrument. However, post-tax effective return (for highest tax bracket of 30.90%) is only 8.79%. Although this is better that bank term deposit, as no bank is offering interest rates in double digit on longer term fixed deposits of 3 years and above, concerns such as business operations involving risky areas of capital market finance coupled with the parentage do not adequately compensate for the risk.
In comparison with current ongoing NCD issues of SREI Infra and Muthoot, the effective yields are higher for India Infoline. However, we maintain our preference for REC’s tax free bonds, which have the PSU-tag, tax free status as well as very long tenures of 15 and 20 years. REC’s 15 years tax free bonds, rated AAA, carry tax free coupon of 8.71% for 15 years, which is scores over India Infoline hands-down.
Previous NCD Issue:
Last September, the company had issued 6 year NCDs which are currently trading on NSE with yields of 12.59% to 14.81%. In comparison with the year-ago issue, the current rates being offered are not attractive, as the 6 year NCD with cumulative interest option, maturing on 17th September 2018 (ISIN INE866108154) are trading at yields 14.81% p.a. This security (although unsecured) has more-or-less the same duration as Series III and IV which have yields of 12.68% and 12% respectively. Thus, the current issue fares poorly even when compared with the company’s previously-issued NCDs which are currently listed and trading on NSE.
Recommendation:
Thus, this issue is not attractive vis-à-vis NCD issues of other companies as well as its own previous issue, currently listed on the bourses. Given the parentage, weak financial strength and shorter duration of the debentures on offer, give this issue a miss.