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.

Disclaimer:
Please note these are our personal views on this investment and we strongly urge you to check with your Personal Financial Advisor before you decide on investing in this NCDs.   This post is not a solicitation to invest in Shriram City Union Finance NCDs.