By Geetanjali Kedia

Introduction:

ECL Finance, the NBFC arm of listed broker Edelweiss Financial Services, is entering the debt capital market with a maiden public issue from the Edelweiss group, offering secured redeemable non-convertible debentures (NCDs) of face value Rs. 1,000 each, to raise Rs. 250 crore with an option to retain another Rs. 250 crore, taking the total fund raising to Rs. 500 crore.

Issue Details:

The issue opens on 16^th January 2014 and closes on 27^th January, with an option in company’s hands to either close the issue earlier or extend the closing. Minimum application amount is Rs 10,000, and in multiples of Rs, 1,000 thereof.

Rating: ‘AA’ by CARE and BWR indicating high degree of safety for timely servicing of financial obligations.

Listing: To be listed on BSE with one NCD comprising a trading lot. NCD would be issued both in physical and demat but trading is necessarily in the demat form on the exchanges.

What’s on offer: The NCD issue has the following four investment options:

^ Edelweiss’ resident Indian individual shareholders and the group’s permanent Indian employees to get additional 0.25% pa interest. Thus, effective yield for 3 years is 12.52% pa and 12.79% pa for 5 years. Redemption value in II and IV is Rs. 1,424.41 and Rs. 1,825.71 per NCD respectively for these class of investors. 

*Assuming highest tax slab of 30.90%

Allocation Ratio: 60% of the issue earmarked for retail investors including high net-individuals and 20% each for corporates and QIBs.

Company Background:

ECL Finance is an NBFC undertaking retail financing, focusing on small ticket home loans and advances to small and medium enterprises (SME), having total loan book of close to Rs. 4,839 crore, as of 30^th September 2013. It lends 48% of its loans to companies for a short term of 18 and 24 months. NCDs will now make up a third source of funding for the company, along with bank loans (comprising 2/3^rd currently) and borrowing from mutual funds (1/3^rd).

For FY13, ECL Finance earned income of Rs. 651 crore with PAT at Rs. 121 crore while H1FY14 income stood at Rs. 427 crore with PAT of Rs. 102 crore. As of 30^th September 2013, networth was Rs. 1,509 crore, gross NPAs were 0.88% of total credit exposure, whereas net NPAs were 0.27%.

Rate of Return:

Below is the comparison of this NCD with other secured NCD offerings currently underway:

(Highest Yield for retail investors for the particular tenure is tabulated for the purpose of comparison)

In the 5 year NCDs, ECL Finance’s offer is the best return with a yield of 12.52%. Moreover, it enjoys the best rating of AA among peers, which is a very important decision making factor for investment in NCDs. This is attractive in relation to bank FD, as no bank offering double digit interest rates on longer term fixed deposits.

However, it does not score well over PSU tax-free bonds (although none open currently, but expected to hit the market). The post-tax effective return (for highest tax bracket of 30.90%) for 5 year NCDs is only 8.65% pa, which is lower that the tax free bonds of PSUs, which besides carrying higher coupons of about 8.75% to even 9% for retail investors, bear the PSU-tag, better credit rating as well as longer tenures (10, 15 and 20 years).

Thus, the 5 year NCDs are attractive for those investors who are non-tax payers or even those in the 10% tax bracket (will have post-tax yield of 11% and 11.26% for NCDs with 3 and 5 years maturity respectively). Tax payers falling under the 20% tax bracket will also have post-tax yield of 9.74% in case of 3 year NCDs and 9.97% for 5 year NCDs, again higher than coupon of tax free bonds.

Recommendation:

Thus, if you fall below the 30% tax bracket (i.e. either of 0%, 10% or 20% bracket), the 5 year NCDs (series III and IV) make a good investment choice as both the credit rating and yields are attractive, backed by growing trajectory for the company’s business.