IRFCL - Tax Free Bonds
By Geetanjali Kedia
Introduction:
Indian Railway Finance Corporation Limited (IRFCL), the financing arm of Indian Railways and wholly owned by Government of India, is entering the debt capital market, for the second time this fiscal, on 28th February 2014, with an issue of Tax Free Bonds of face value of Rs.1,000 each, in the nature of Secured Redeemable Non Convertible Debentures.
Issue Details:
Closing on 7th March, has a size of Rs.1,500 crore, with an option in company’s hand to retain an oversubscription upto Rs.1,416.88 crore, aggregating to Rs. 2,916.88 crore. Minimum application amount is Rs. 5,000, and in multiples of Rs, 1,000 thereafter.
Rating: AAA by CRISIL, CARE and ICRA, indicating highest degree of safety regarding timely servicing of financial obligations.
Listing: NSE and BSE. Bonds are to be issued both in physical and dematerialized form, hence a demat account is not necessary to buy these bonds. Trading in the bonds will necessarily be in the demat form.
What’s on offer: The current bonds are being offered under two series with features as under:-
| Particulars | Series 1 | Series 2 |
| Tenor | 10 Years | 15 Years |
| Frequency of Interest Payment | Annual | Annual |
| Coupon Rate (%) p.a. | ||
| 8.44% p.a. | 8.88% p.a. |
| 8.19% p.a. | 8.63% p.a. |
| Tax-effective Yield (%) p.a. at highest tax bracket of 30.9% | ||
| 12.21% p.a. | 12.85% p.a. |
| 11.85% p.a. | 12.49% p.a. |
| Put / call Option | None | None |
*Retail investor defined as individual, HUF, upto limit if Rs. 10 lakh
Allocation ratio: 40% for retail investors, 20% for HNIs, 30% for corporate, 10% for QIB
Rate of Return:
IRFCL’s 15 year (Series 2) bonds are comparable to 12.85% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. This coupon rate is same as those being offered by IIFCL and IREDA, all three issues being triple rated and currently open for subscription. However, it is a significant 20 basis points lower than AA rates Ennore Port’s 9% pa coupon, now open.
IRFCL’s previous 15 year bond, issued just a month back in January 2014 carrying coupon of 8.65% pa, is currently trading on NSE with yields of 8.79%. Thus, the listed yields are only 9 basis points lower than the current primary offering, despite 20 basis point lower coupon rate, as 15 year bond issues have seen spike in yields across the board.
Ovee the next 4 weeks, 3 other PSUs are in fray to offer tax free bonds to the public. We believe that an issuer like HUDCO which has AA rating will price the issue competitively by offering 15-20 basis points higher coupon rates as compared to a triple-A rated PSU bond. Hence, one must wait for such issues in the coming few days.
Recommendation:
IRFCL’s current bond issue is not most attractive, as coupon rate is lower due to its AAA rating. Give it a miss and wait for upcoming issues from other PSUs.