Shriram NCD offers returns upto 11.5%
Jul 30, 2009

Author: PersonalFN Content & Research Team

Shriram Transport Finance Company Limited (STFC) is again in the news. While only few days back the company came out with attractive fixed deposit offering, this time, it came out with a public issue of Secured Non-Convertible Debentures (NCDs).

The NCD is available for subscription from July 27, 2009 till August 14, 2009; after which they will be traded on the NSE (National Stock Exchange). The minimum application amount is Rs 10,000.

It offers 5 investment options (refer to the table below), and investors can choose any one of them. There are also put and call options available to the investors in option III & IV at end of 48 months.

Investors who are looking for attractive returns can consider investing in these NCDs as they are secured by the assets of the company and also yield returns higher than bank FDs. The interest income from NCDs is taxable, hence the post-tax return would be in the range of 7.5% to 8.0%. They are rated ‘AA+’ by CARE and ‘AA(ind)’ by Fitch. But, before investing in them, investors should not ignore the risk

As an NBFC, STFC is into lending and investment activities like banks. Therefore, the risk of not being able to recover monies from customers can adversely affect its profitability which in turn will impact its ability to pay interest on the debt.

For example, if a company has generated Profits/Earnings Before Tax of Rs 100 and its interest on debt is Rs 60, then the company would comfortably pay the interest from the profits and will be left with Rs 40 minus tax. However, if the Interest expense is more than Rs 100 then the company does not have the ability to service the debt and it can default on the payment.

To determine its ability to service the interest on debt we evaluate the Interest Coverage ratio of STFC as following:

Year Ending	Mar-2005	Mar-2006	Mar-2007	Mar-2008	Mar-2009
Interest Coverage Ratio: EBIT/Interest
STFC	1.52	1.59	1.45	1.49	1.49
HDFC Ltd.	1.69	1.67	1.58	1.56	1.43
Sundaram Finance	1.56	1.51	1.48	1.50	NA
GRUH Finance	1.43	1.44	1.44	1.50	1.35

This ratio is calculated by dividing the Earnings Before Interest and Taxes (EBIT) by the Interest paid on debt. The ratio of more than 1 means EBIT is more than the Interest, which means the company has generated enough profit to pay the interest. However, if the ratio is less than 1, then the company won’t be able to service its debt and can default on the interest payment.

As can be seen from the table above, STFC’s interest coverage ratio is more than 1 which indicates it has been able to service its debt so far. Likewise, other NBFCs were also able to service the interest on debt.

However, this is the past performance of the company, the future profitability and its ability to service the debt will depend upon demand for its product, competition in the market and the ability to recover money from its customers. This instrument hence qualifies as a high risk-high return investment proposition.