Religare Finvest Ltd. is in the market to raise money up to an amount of up to Rs. 500 crore in the form of NCDs (non-convertible debentures).
We will analyze the attractiveness of the Religare Finvest NCD issue.
You will also understand how to analyze important points that matter for any debenture investment.
A few earlier articles will be useful in understanding NCD investments.
How can you make safe debt investments?
In the last few days, Capital Orbit analyzed the following recent NCD issues,
India Infoline Finance Ltd. NCD
Shriram City Union Finance Ltd. NCD
Issue open and close
The Religare Finvest issue opens on 14th September 2012 and closes on 27th September 2012.
Prospectus
Any company that is issuing debentures has to share its prospectus, a document that contains details of the issue, with prospective investors. You can access the Religare Finvest NCD prospectus in the following ways:
- SEBI website
- Go to www.sebi.gov.in
- Click on Offer documents in the menu
- Click on Debt Offer Document
- Click on Final Filed with RoC (the other link is for the draft Prospectus)
- Open the Religare Finvest NCD prospectus
- Its own website. In this case, Religare Finvest’s website
- Go to www.religarefinvest.com/
- On home page, the menu on the left has a item called Investors.
- Within Investors, click on Prospectus.
- Agree to the disclaimer.
- Download Prospectus from given link.
What you see on the very first page of the prospectus is the following.
Public Issue by Religare Finvest Limited, (“Company” or “Issuer”) of Secured Redeemable Non-Convertible Debentures of face value of Rs. 1,000 each, (“NCDs”), aggregating upto Rs. 2,500 million with an option to retain over-subscription upto Rs. 2,500 million for issuance of additional NCDs aggregating to a total of upto Rs. 5,000 million, hereinafter referred to as the “Issue”.
Secured
There are secured and unsecured debentures respectively. An easy analogy is a home loan that you take from a bank. The home is the security. The bank has a secured loan. If you fail to pay the bank on time, the bank can ask you to vacate your home. They will then sell the home (security) and recover their money to the extent possible.
In case of default, secured borrowers have the first right to liquidate the assets the company and take their money back. Unsecured lenders always stand in line after secured lenders. A secured lender generally is on stronger footing.
Non-convertible
Certain debentures are convertible into equity shares of the company.
In Religare Finvest NCD’s case, they are not convertible into equity shares.
Credit Rating
CARE and CRISIL are credit rating agencies which rate public issues.
CARE has rated it as CARE AA-.
ICRA has rated it as [ICRA] AA-(negative).
If you are not familiar with ratings, know that Government of India bonds are usually rated AAA which is the best possible rating.
Terms of issue
There are multiple investment options as follows:
Minimum application – Rs. 10,000/- (10 NCDs) (for all Series of NCDs, namely Series I, Series II, Series III, Series IV and Series V either taken individually or collectively)
Series | I | II | III | IV | V |
---|---|---|---|---|---|
Tenor | Thirty six months and one day from the deemed date of allotment | Sixty months from the deemed date of allotment | Holders in reserved individual portion – 70 months from deemed date of allotment, For all other NCD holders – 72 months from deemed date of allotment | ||
Frequency of interest payment | Annual | Cumulative | Annual | Cumulative | Cumulative | In Multiples | Rs. 1,000/- (1 NCD) | Rs. 1,000/- (1 NCD) | Rs. 1,000/- (1 NCD) | Rs. 1,000/- (1 NCD) | Rs. 1,000/- (1 NCD) |
Face Value of | Rs. 1,000/- | Rs. 1,000/- | Rs. 1,000/- | Rs. 1,000/- | Rs. 1,000/- |
Issue Price (Rs./NCD) | Rs. 1,000/- | Rs. 1,000/- | Rs. 1,000/- | Rs. 1,000/- | Rs. 1,000/- |
Coupon (%) per annum | 12.25 | Not Applicable | For NCD Holders in the Reserved Individual Portion – 12.50, for all other NCD holders – 12.25 | Not Applicable | Not Applicable |
Effective yield (%) per annum | 12.25 | 12.25 | For NCD Holders in the Reserved Individual Portion – 12.50, For all other NCD holders – 12.25 | For NCD Holders in the Reserved Individual Portion – 12.50, For all other NCD holders – 12.25 | For NCD Holders in the Reserved Individual Portion – 12.6184, For all other NCD holders – 12.2462 |
Redemption Amount (Rs. / NCD) | Repayment of the face value plus accrued interest. | Rs. 1,414.36 | Repayment of the face value plus accrued interest. | For NCD Holders in the Reserved Individual Portion – Rs. 1,802.23, For all other NCD holders – Rs. 1,782.10 | Rs. 2,000 |
In the Series II, IV and V you receive no interest over the tenure of the bond. You get a lumpsum amount back at end of the tenure.
For example in Series II, for every Rs. 1000/- you invest, you get Rs. 1414.30/- back at the end of 36 months. It effectively works out to investing Rs. 1000/- in a 1 year tenure instrument which yields 12.25% per annum and re-investing principal plus interest every year again at 12.25% till the end of tenure.
Summary of business
Religare Finvest, a non-banking financial company (NBFC), is mainly in the business of providing financing. They raise funds from banks, private parties, public debenture holders and lend the money onward. The chart below gives a breakup of the loan book as of 31 March 2012 as per their NCD Prospectus.
Source: Religare Finvest NCD Prospectus, Capital Orbit
Of the total loan book, 14% is towards unsecured lending while balance is towards secured lending. Unsecured lending is risky as compared to secured lending for reasons explained above.
Net non-performing assets (NPAs) as of 31 March 2012 are 0.52% of their loan book which is fairly low and a positive point.
SME Finance in all makes up 70% of the loan book.
In times of economic downturn, small and medium enterprises (SME) are impacted more than large enterprises. This was one of the risk factors in the Shriram City Union NCD issue too.
Even if things go wrong the Company can choose to enforce the right to possess the security. If the security is property it is not easy to immediately liquidate it in a bad market. This was also explained in the post on the IIFL NCD article.
Loan against property in SME Finance segment is the biggest segment for Religare Finvest. I have covered the risk in this segment in the next section in this post.
Risk factors
This section in the prospectus is a must read because it is the company’s own declaration of the major risk factors that affect their business.
A significant portion of our disbursements comprise loans against property, commercial asset funding (which includes commercial vehicle loans and equipment finance), and small and medium enterprises working capital loans. Any adverse developments in these sectors would adversely affect our results of operations.
…..Our loans against property business is the largest component of our loan book. As at March 31, 2012, our total book size was Rs. 58,709.84 million, which comprised 47 % of our total loan book. In case of significant decline in property prices, or defect in terms of title of the property, we may not be able to recover our principal and interest in case of default.
Any business operates in the light of certain risks. An investor has to appraise whether he or she is comfortable taking exposure to an instrument that is affected by these risks. We are expected to see at least a year of low growth in the economy. With such an outlook, I see this risk factor gaining importance in determining the health of the financials of Religare Finvest.
Red flags
I was quite uncomfortable with one point on page 109 of the Prospectus. The company has disclosed that they have made investments in funds promoted by the Religare Group which have a mandate to invest in alternate asset classes like art and media.
There are 2 problems I see:
- Funds within the company are being used for such related-party transactions which add no value to the lending business.
- Art and media investments are illiquid assets (if one may call them assets at all) and may suffer high losses in bad market cycles.
Liquidity
These debentures will be listed on the BSE and NSE. If you want to exit the investment by selling on the exchange be aware that there is low liquidity, a fact which is also pointed out in one of the risk factors.
If you see the link above, you will notice that usually volumes are not very high in the debt segment.
Taxation
The interest rate return is pre-tax. Tax applicable to interest earned from debentures is as per the tax slab you fall in i.e. 10%, 20%, 30%.
If you sell the debenture on exchange before one year it will qualify for short-term capital gains tax as per your tax slab.
If you sell the debenture on exchange after one year or you hold it till redemption, long-term capital gains tax is 10%.
Summary
Look for safety of capital (return of capital) first before you look for return on capital. An extra 2-3% should not make you forget the risks to your principal investment, as a general rule.
Religare Finvest is an NBFC with 70% loan book exposure to SME Finance. In a tough economic scenario, SMEs are on weaker footing as compared to large enterprises. 47% of the loan book is backed by property which is relatively illiquid. There are a few red flags with respect to related party transactions.
I will avoid this issue like Shriram City NCD and IIFL NCD respectively.
It might seem that I consider all NCDs negatively. I analyze the pros and cons of each independently. It is just that I have not found any of these three NCDs satisfactory for investment.
I will be also discussing the Muthoot Finance NCD in due course.
Read the disclaimer.
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nitin wahie says
sir i m goin to invest in muthood finance, so can u plz upload your article on muthood finance shortly….
i also wanted to now whether it is a secured debentures or not? kindly respond soon..
thanx in advance….
Kunal Pawaskar says
Nitin, sorry, but I have not looked at Muthoot finance. I don’t have a view on it.
http://www.thehindubusinessline.com/industry-and-economy/banking/muthoot-finance-plans-rs-500cr-ncd-issue-this-quarter/article4310003.ece?ref=wl_industry-and-economy
This article does not tell you more about whether it is secured or unsecured.
As I wrote in earlier articles on NCDs, the current crop of NCDs don’t inspire a lot of confidence in me. Anyway, we need not swing our bat for every pitch that comes our way, like Warren Buffett said. I follow that principle!
And don’t start with “Sir”, Kunal is just fine! Hope to see you around on Capital Orbit.
Sudheer says
The NCD will attract Long term Capital Gain tax at 10% without Indexation benefit only if sold in market. If held till maturity it will be taxed as Interest and added to Interest income and taxed as per slab of Individual. CLARIFY Pls
SK ZEESHAN ALI says
Sir,
I have religare ncd, kindly let me know on maturity do I need to reddem it or the maturity amount will get credited to my bank account directly.
RAJESH PANDEY says
I had invested in Religare finvest NCD in 2012 but investment documents is lost. Pl help me for redeemption of my money.
Can i get duplicate copy of my investment documents?
Regards
Rajesh Pandey