IIFL NCD September 2013

I am sharing my views on the IIFL NCD issue that opens on 17 September 2013.

I had shared my analysis on the IIFL NCD issue that was launched earlier in September 2012. I recommend that you read the earlier analysis first.

Key differences

IIFL NCD September 2013 is a secured issue. It ranks higher than the unsecured issue from 2012 in terms of claims on assets. It has a “Care AA” rating from CARE.


My view

You should look at returns on a post-tax basis. For someone in the highest tax bracket, the 12% coupon rate works out to approximately 8.4% post-tax. The post tax return figure for an investor in the 10% tax bracket is 9.6%. It is 10.8% for someone in the 20% tax bracket.

I shared this view last year that one should not chase a 2-3% yield difference over other conventional options like bank FDs. I still maintain this view for someone in the 10% tax bracket.

If you are indeed interested in debt investment options, why not look at the REC bonds issue which is open right now? It is tax free with a return on 8.71%. It has a better credit rating – “CARE AAA”.

REC has a higher return on net worth than IIFL. It stands at around 23% for FY13 (on average basis) versus IIFL which has a net worth of around 11% for FY12. Both these figures are for standalone financials. A higher return on net worth for similar leverage (debt to equity of around 6 times for both companies) suggests a better financial profile for REC as compared to IIFL.

There is one hitch (or boon) depending on your investment period. REC has a 15 year maturity period whereas IIFL NCDs have a 3 year and a 5 year period respectively. If you have a shorter investment period REC might not be right for you.

You might argue that both will get listed on the exchange. Hence, exit should not be a problem.

Both instruments will get listed on the exchanges. The problem with listed debt in India is that usually there is low liquidity. So, if you are hoping to exit down the line, you might not get an opportunity.

Do share your views – for or against this investment using the comments section below. As usual, the disclaimer applies.


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    • says

      I stand by my views Ashish. Chasing an extra 1-2% has hurt people in the past. There are numerous examples. I am not saying that I am sure that things will go bad but I would not want to take chances. Return “of” capital is more important than return “on” capital.

  1. Subodh says

    !0% brecket will earn 10.80% after tax and that to interest paid on monthly basis. Invest Montly Interest in other good Recurring Deposit scheme giving 9% at the moment. It is secured debenture and with 36 Month horizon you are reasonably safe. Also No TDS on Interest if held in Demat format. . All to all a very good option to invest in.

    • says

      Hi Subodh,

      Its ok that our views differ. Only one point that I will speak on. For the benefit of others, no TDS on interest does not mean that the tax liability goes away. One’s tax dues still remain.

      Are you investing or have invested already?


  2. Dinesh says

    The one major disadvantage of these NCD is that there is no Cumulative option. For a person not looking at periodic cash flow, these bonds are not of much use. You would have the additional chore of setting up a recurring deposit for the monthly interest received. Also, to receive anything significant monthly, the initial investment should be a large value to begin with. So I am not sure if this will be a hit with younger folks who usually prefer the Growth option in MF or Cumulative option in FD and have a limited sum to invest.
    The recent issue of Shriram was much better in this respect. Not only was it from a credible firm, but also provided a Cumulative option for the category of investors mentioned above. And to top it all, the interest rate was very attractive indeed.

  3. vikas says

    I do not agree with the leverage comparison between REC and IIFL. While I have not looked at the financials, it is obvious that REC’s debt being quasi-soverign shall be way cheaper than that of IIFL. The higher RoNW does however signify higher security cover for investors, but then does it really bother much? Moreover, not many people pay taxes properly in India.

    • says

      Vikas, I agree with you that REC will have cheaper financing. But they typically will not lend at rates that an NBFC lends at. An NBFC borrows at relatively high rates and lends at higher rates.

      RoNW will be based on PAT and PAT will be based on Net interest margins. In the end, if they can’t earn a decent PAT on the equity capital in the business, does it not suggest that the business is not too attractive at the core?

      Would like to hear your views.

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