Is Shriram Transport Finance NCD a worthy investment?     (03-Oct-2013 )



Shriram Transport Finance Company Limited is currently offering secured Non-Convertible Debentures (NCD) at attractive interest rates. The NCD offering is open for subscription from October 07, 2013 to October 21, 2013. But the basis of allotment will be on a first come first serve basis.

Shriram Transport Finance Company Limited (STFCL) is the flagship company of the Shriram group which has significant presence in Consumer Finance, Life Insurance, General Insurance, Stock Broking and Distribution businesses. Established in 1979, Shriram Transport, at present is the largest asset financing NBFC (Non-Banking Finance Company) in the country and holistic finance provider for the commercial vehicle (CV) industry and seeks to partner small truck owners for every possible need related to their assets.

The business model

STFCL is a major player in the domestic CV finance segment, with assets under management worth Rs 49,676 crore as on March 31, 2013. It is the leader in the pre-owned CV finance segment, with a market share of around 25%. The company has a healthy presence in the new CV finance segment, with a market share of around 7%. The company lends predominantly to the single-road transport operator (SRTO) segment, which accounts for a significant proportion of its outstanding portfolio. STFCL has its focus in catering to the needs of the Small Truck Owner (STO) and financing pre-owned trucks. It has PAN India presence with 539 branch offices. Moreover, the capital adequacy ratio (CAR) of STFCL too, is quite impressive; CAR of 20.74% as on March 31, 2013 as against the stipulated CAR of 15% by the RBI. The net Non-Performing Assets (NPAs) form a miniscule 0.77% as on March 31, 2013 which indicates prudent management of assets.

Thus, in order to augment the lending and investment needs of the company, STFC is currently offering secured Non Convertible redeemable Debentures (NCD) of face value of Rs 1,000 each at par aggregating to Rs 250 crore along with an green shoe option to retain oversubscription upto Rs 250 crore.

The details of the offering (NCD) are as follows:
Issuer Shriram Transport Finance Company Limited
Offering Public Issue of secured  NCDs aggregating upto Rs 250 crore with an option to retain over subscription upto Rs 250 crore for issuance of additional NCDs, thereby aggregating to a total of upto Rs 500 crore.
Rating 'AA/Stable' by CRISIL & 'CARE AA+' by CARE
Security The principal amount of the NCDs to be issued in terms of this Prospectus together with all interest due on the NCDs, as well as all costs, charges, all fees, remuneration of Debenture Trustee and expenses payable in respect thereof shall be secured by way of first and exclusive charge in favour of the Debenture Trustee on an identified immovable property and specified future receivables of our Company as may be decided mutually by our Company and the Debenture Trustee. Our Company will create appropriate security in favour of the Debenture Trustee for the NCD Holders on the assets adequate to ensure 100% asset cover for the NCDs, which shall be free from any encumbrances.
Face Value Rs 1,000 per NCD
Issue Price At par (Rs 1,000 per bond)
Minimum Subscription 10 NCDs and in multiples of 1 NCD thereafter
Options
  • Series I: 36 months, Annual
  • Series II: 60 months, Annual
  • Series III: 84 months, Annual
  • Series IV: 36 months, Cumulative
  • Series V: 60 months, Cumulative
  • Series VI: 84 months, Cumulative
Trustee IDBI Trusteeship Services Limited
Listing NSE & BSE
Depository National Securities Depository Limited and Central Depository Services Limited
Registrars Integrated Enterprises India Ltd
Issuance All Series of NCDs will be allotted in the dematerialized form and/or the physical form, at the option of the Applicant
Issue Open Date October 07, 2013
Issue Close Date October 21, 2013
Deemed Date of Allotment The Deemed Date of Allotment for the NCDs shall be the date on which the duly authorized committee of the Board of Directors constituted by resolution the Board dated May 7, 2013 approves the allotment of NCDs and as mentioned on the Allotment Advice/regret or such date as may be determined by the Board of our Company and/or a duly authorized committee thereof and notified to the Stock Exchanges. All benefits under the NCDs including payment of interest will accrue to the NCD Holders from the Deemed Date of Allotment. Actual credit of NCDs to the beneficiary account of the holder of NCD may occur on a date other than the Deemed Date of Allotment.
Eligible Investors  
Category I
(Institutional Investors)
  • Resident public financial institutions as specified in Section 4 A of the Companies Act authorized to invest in the NCDs;
  • Statutory corporations including State Industrial Development Corporations, commercial banks, co-operative banks and regional rural banks incorporated in India and authorized to invest in the NCDs;
  • Indian Provident funds, pension funds, superannuation funds and gratuity funds, authorized to invest in the NCDs;
  • Indian alternative investment funds registered with SEBI;
  • Indian insurance companies registered with the IRDA;
  • Indian Mutual Funds registered with SEBI;
  • National Investment Fund set up pursuant to the resolution F. No. 2/3/2005-DD-II dated November 23, 2005 by the Government of India; and
  • Insurance funds set up and managed by the Indian army, navy or the air force of the Union of India or by the Department of Posts, India
Category II
(Non-Institutional Investors)
  • Companies, bodies corporate and societies, registered under the applicable laws in India, and authorized to invest in the NCDs;
  • Trusts settled under the Indian Trusts Act, 1882, public/private charitable/religious trusts settled and/or registered in India under applicable laws, which are authorized to invest in the NCDs;
  • Resident Indian scientific and/or industrial research organizations, authorized to invest in the NCDs;
  • Partnership firms formed under applicable laws in India in the name of the partners, authorized to invest in the NCDs; and
  • Limited Liability Partnerships formed and registered under the provisions of the Limited Liability Partnership Act, 2008 (No. 6 of 2009), authorized to invest in the NCDs.
Category III
High Net-worth Individuals, ("HNIs")
  • Resident Indian individuals who apply for NCDs aggregating to a value more than Rs 5 lacs, across all Series of NCDs; and
  • Hindu Undivided Families through the Karta who apply for NCDs aggregating to a value more than Rs 5 lacs, across all Series of NCDs.
Category IV
(Retail Individual Investors)
  • Resident Indian individuals who apply for NCDs aggregating to a value not more than Rs 5 lacs, across all Series of NCDs; and
  • Hindu Undivided Families through the Karta who apply for NCDs aggregating to a value not more than Rs 5 lacs, across all Series of NCDs.
Note: PAN card is mandatory for subscribing to these bonds. A self attested copy shall be enclosed along with the application form.

Individual investors will have the following options available at the time of subscribing to the issue:
Series I II III IV V VI
Minimum Application
/Face Value
Rs 10,000 Rs 10,000 Rs 10,000 Rs 10,000 Rs 10,000 Rs 10,000
In Multiples
of
Rs 1,000 Rs 1,000 Rs 1,000 Rs 1,000 Rs 1,000 Rs 1,000
Tenor 36 months 60 months 84 months 36 months 60 months 84 months
Redemption
Date
36 months from the Deemed Date of Allotment 60 months from the Deemed Date of Allotment 84 months from the Deemed Date of Allotment 36 months from the Deemed Date of Allotment. 60 months from the Deemed Date of Allotment 84 months from the Deemed Date of Allotment
Redemption
Amount
Repayment of the Face Value plus any interest at the applicable Coupon that may have accrued at the Redemption Date plus Additional Incentive as may be applicable for Individual NCD Holders Repayment of the Face Value plus any interest at the applicable Coupon that may have accrued at the Redemption Date plus Additional Incentive as may be applicable for Individual NCD Holders Repayment of the Face Value plus any interest at the applicable Coupon that may have accrued at the Redemption Date plus Additional Incentive as may be applicable for Individual NCD Holders Rs 1,377.30 per NCD Rs 1,723.87 per NCD Rs 2,177.70 per NCD
Interest
Payment
Annual Annual Annual Cumulative Cumulative Cumulative
Coupon 10.75% per annum 10.75% per annum 10.75% per annum N.A. N.A. N.A.
Additional
Incentive
0.50% 0.75% 1.00% N.A. N.A. N.A.
Aggregate Coupon 11.25% per annum 11.50% per annum 11.75% per annum N.A. N.A. N.A.
Tax slabs
(%)
10.30 20.60 30.90 10.30 20.60 30.90 10.30 20.60 30.90 10.30 20.60 30.90 10.30 20.60 30.90 10.30 20.60 30.90
Effective
Yield -Pre
Tax (%)
11.25 11.25 11.25 11.50 11.50 11.50 11.75 11.75 11.75 11.25 11.25 11.25 11.50 11.50 11.50 11.75 11.75 11.75
Post Tax
Returns (%)
10.09 8.93 7.77 10.32 9.13 7.95 10.54 9.33 8.12 10.19 9.12 8.02 10.52 9.50 8.45 10.84 9.88 8.87
(Source: Shriram Transport Finance Co. Ltd. & PersonalFN Research)

Well, after reading the details of the NCD (as provided above), there may be still some more questions popping up, which are answered hereunder:

  • Will I get any tax benefit if I invest in these bonds?

    No, these bonds do not entitle you to any tax benefit nor are these any "infrastructure bonds", which make you eligible for an additional tax deduction under section 80 CCF.


  • What is the Tax Treatment of interest on these Bonds? Are these Bonds Tax Free?

    No, the interests on these bonds are not tax free - they are chargeable to tax. The interest income will be taxed under "income from other sources", and will be brought to tax at the respective income tax rates you fall under.

    The Tax Deduction at Source (TDS) will not take place as these bonds are issued in a demat form and are listed on the exchange. However, for Reserved Individual (RI) opting for physical form, TDS will take place accordingly.


  • Can a minor apply to these bonds?

    Yes, a minor can apply for these bonds, but only through a guardian.


  • Can one apply in joint names?

    Yes, one may apply in a joint name. However, the demat accounts will also be required to be held in joint name and the order of applicants must be the same as appearing in the demat account. Moreover, all payments will be made out in favour of the first applicant as well as all communications will be addressed to the first named applicant whose name appears in the application form and at the address mentioned therein.


  • Who will get the interest in case of joint application?

    In case of joint application, interest will be accounted to the first holder only.


  • My demat account is in joint name, but I want to apply is a single name?

    In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do.


  • If I'm an NRI can I invest in these bonds?

    No, NRIs are not eligible to invest in these bonds.


  • Is there a lock-in period while investing?

    No. There is no lock-in period for these bonds.


  • In whose favour the cheque is to be made?

    Cheques have to be made in the favour of "Escrow Account STFC NCD Public Issue" and crossed "A/C PAYEE ONLY".

OUR VIEW:

PersonalFN is of the view that the yields on investment offered by STFCL are quite appealing. Also, the credit rating allotted to the issue is stable (AA/Stable by CRISIL and AA+ by CARE) along with the ticket size (minimum investment amount) being kept low at Rs 10,000/- (in order to encourage greater retail participation).

Moreover, the company has a Debt to Equity ratio of 4.31 (calculated from the investor presentation in Mar 2013, the post NCD issue D/E ratio will be 4.42) and an interest coverage ratio of 2.31 indicating that the company is comfortably leveraged and is well placed to service its debt for the kind of business model it follows.

Thus, from a holistic point of view NCD of STFCL is worth subscribing for. However, depending upon your cash flow needs, you may select either the annual coupon payments option or the cumulative option; wherein interest along with the principal amount is available on maturity only. To get the highest post-tax returns, it would be prudent to invest in this issue from a long term point of view (for 84 months) due to better yields on the offering. However it is vital to consider your liquidity requirements and investment horizon while determining the investment tenure.


In case you wish to invest in the above instrument, you can email us at info@personalfn.com or contact us on 022-6136 1200

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