Shriram City Union Finance 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 Shriram City Union Finance NCD (Shriram City NCD) issue.
You will also understand how to analyze important points that matter for any debenture investment.
I have written two articles which you might find useful in understanding NCD investments.
The issue opened on 12th September 2012 and closes on 26th September 2012.
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 Shriram City NCD 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 Shriram City NCD prospectus
- Its own website. In this case Shriram City Union Finance’s website
- Go to www.shriramcity.in
- On home page, at bottom left, click the red button for Prospectus.
- Agree to the disclaimer.
- Prospectus opens in new window
Some people I spoke with were confusing this NCD issue with Shriram Transport Finance. Shriram Transport Finance and Shriram City Union Finance are different entities.
What you see on the very first page of the prospectus is the following.
Public Issue by Shriram City Union Finance Limited, (“Company” or “Issuer”) of Secured Non-Convertible Debentures of face value of Rs. 1000 each, (“NCDs”), aggregating upto Rs. 25,000 lacs with an option to retain over-subscription upto Rs. 25,000 lacs for issuance of additional NCDs aggregating to a total of upto Rs. 50,000 lacs, hereinafter referred to as the “Issue”.
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.
Certain debentures are convertible into equity shares of the company.
In Shriram City NCD’s case, they are not convertible into equity shares.
CARE and CRISIL are credit rating agencies which rate public issues.
CARE has rated it as CARE AA.
CRISIL has rated it as CRISIL AA-/Stable.
If you are not familiar with ratings, know that Government of India bonds are rated AAA which is the best possible rating.
Terms of issue
There are multiple investment options as follows:
|Frequency of interest payment||Annual||Annual||Not applicable||Not applicable|
|Minimum application in Rs.||10000||10000||10000||10000|
|Face value of NCD||1000||1000||1000||1000|
|Frequency of interest payment||Monthly||Annually||Not applicable||Not applicable|
|Interest rate (%) per annum||10.60||10.75||Not applicable||Not applicable|
|Additional incentive on coupon (%)||0.90||1.00||Not applicable||Not applicable|
|Coupon + additional incentive (%)||11.50||11.75||Not applicable||Not applicable|
|Effective yield (%)||11.50||11.75||11.50||11.75|
|Redemption date from deemed date of allotment||36 months||60 months||36 months||60 months|
|Redemption amount||Face value plus interest plus additional incentive||Face value plus interest plus additional incentive||Rs. 1386.20 per NCD||Rs. 1743.30 per NCD|
* additional coupon incentive is for individual investor. Non-individual investor is not eligible for additional coupon incentive.
In the Series III and IV you receive no interest over the tenure of the bond. You get a lumpsum amount back at end of 36 and 60 months respectively. Effective yield is again 11.50% and 11.75% respectively. Take the case where yield is 11.50% for 36 months. Here for every Rs. 1000/- you invest, you get Rs. 1386.20/- back at end of 36 months. It effectively works out to investing Rs. 1000/- in an instrument which yields 11.50% per annum and re-investing interest every year again at 11.50% till the end of tenure.
Summary of business
Shriram City Union Finance is 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: Prospectus, Shriram City Union Finance NCD, Capital Orbit
Net non-performing assets (NPAs) as of 31 March 2012 are 0.38% of their loan book which is fairly low and a positive point.
Loans backed by gold which include small enterprises finance collateralized by gold and loans against gold make up the biggest chunk of their business.
Gold loans have come under scrutiny by the RBI. A drop in gold prices can hit the value of the gold and gold jewellery that is pledged by customers. Banks are increasingly getting active in the gold loan segment. Competition can put further downward pressure on the interest Shriram City can charge on gold loans.
Read a recent article on the gold loan business.
I do not find this segment of the business very attractive.
The next segment by size is small enterprise finance which makes up 29.4% of the loan book. I have covered my views for this segment in the next section.
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.
High levels of customer defaults could adversely affect our business, financial condition and results of operations.
In addition, our customer portfolio principally consists of the under-banked community which does not typically have easy access to financing from commercial banks or other organized lenders and often have limited credit history. Such borrowers generally are less financially resilient than larger corporate borrowers, and, as a result, they can be more adversely affected by declining economic conditions. In addition, a significant majority of our client base belongs to the low or middle income group. In addition, we may not receive updated information regarding any change in the financial condition of our customers or may receive inaccurate or incomplete information as a result of any fraudulent misrepresentation on the part of our customers. Furthermore, unlike several developed economies, a nationwide credit bureau has only recently become operational in India, so there is less financial information available about the creditworthiness of our customers. It is therefore difficult to carry out precise credit risk analyses on our clients. Although we follow certain procedures to evaluate the credit profile of our customers at the time of sanctioning a loan, we generally rely on the referrals from the current or past customers of our Company or those of other entities in the Shriram Group.
Any business operates in the light of certain risks. That is the business-owner’s choice. As investors, we have to appraise whether we are alright with taking exposure to an instrument that is affected by these risks. The current economic scenario is not great to say the least. We are going 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 Shriram City Union Finance.
I am not comfortable with the impact of the possible economic outlook on Shriram City Union Finance.
These debentures will be listed on the exchange. 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 volumes are not very high in the debt segment.
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%.
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.
Shriram City Union Finance is an NBFC with exposure to gold backed loans which I consider risky because the security is exposed to sharp drops in price of gold.
Small enterprise finance is the second largest segment in the loan book. In a stressed economic scenario with low growth and high inflation I would consider this segment as having high-risk.
I will avoid this issue. Read the disclaimer.
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