Shriram Finance

Shriram Transport Finance, India’s largest commercial vehicle financing company, has entered the debt capital market with a public issue of secured non-convertible debentures (NCD) of face value Rs. 1,000 each, on 16^th July 2013, to raise Rs. 375 crore, with an option to retain another Rs. 375 crore, taking the total fund raising to Rs. 750 crore.

Issue allocation: 50% reserved for retail investors, 30% for HNIs and 10% each for institutions and non-institutions

Closing date: 24^th July 2013 (with option to close / extend the issue)

Listing: NSE and BSE, one NCD comprising one trading lot

Application Amount: Minimum Rs 10,000 and in multiples of Rs. 1,000 thereafter

Rating: ‘AA/Stable’ by CRISIL, ‘AA+’ by CARE, indicating high degree of safety for timely interest and principal payment

Under the current issue, there are three different tenures being offered to investors – 3 years, 5 years and 4+1 years (50% redemption at end of 4 years and 50% at end of 5 years). Based on the type of investor, frequency of interest payment and tenure of instrument, different interest rates ranging from 9.40% to 11.15% p.a. are being offered:

Thus, the highest rate of interest is being offered to individual investors under the 4+1 years tenure i.e. Series II and Series V, at 11.15% per annum effective yield. Infact, Series III with 5 year tenure is offering the lowest yield of 10.63%.
 

Shriram Transport Finance, a deposit-taking NBFC with assets under management (AUM) of Rs. 52,717 crore as of March 31, 2013, is the the only organised player in the pre-owned CV financing market, coupled with a healthy balance sheet with capital adequacy ratio (CAR) of 20.58% as of 31st March 2013, against RBI’s requirement of 15%. Company’s total income for FY13 was Rs. 7,014 crore (up 13% YoY), with net profit of Rs. 1,463 crore (up 12% YoY). The company’s net NPAs are just 0.8% of net loan assets in FY13, on networth of Rs. 7,338 crore. The funds raised via the NCD issue will be used for financing activities, repaying existing loans, business operations and working capital requirement. Thus, the company is fundamentally sound with a strong balance sheet.

NCDs offer dual advantage of higher coupon rates and liquidity, as they are listed on the stock exchanges, making it an attractive investment option for retail investors, vis-à-vis other fixed income products, such as bank FD or debt schemes of mutual funds. Also, 11.15% interest rate is attractive in the current macro environment. Even on a post-tax basis, Series II and V offer net return of 7.70% pa to those falling in the highest tax bracket.

Although listed, NCDs being very thinly traded on the stock exchange, a comparison of yields with peers or previous issues would be inappropriate. Take for example, the NCDs issued in July 2012 at coupon of 10.25% and 10.50% are trading at yields of 9.40-9.50%. Moreover, there are few company deposits offering yields of 15.07% for 3 years (e.g. IVRCL). However, risk-reward pay-off is not favourable.

Current NCD issue from the Shriram group is very attractive for retail investors as it offers high ‘fixed returns’ for a long-term duration of 5 years. The group is perceived to be very investor friendly and has a history of successful NCD issues in the past. Those looking for diversified investment options can apply in the issue (Series II or Series V), which scores over other ‘fixed income’ investment options.