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NCD with an attractive monthly payout option

LiveMint logoLiveMint 12-06-2014 Lisa Pallavi Barbora

After successfully completing its first-ever issue of non-convertible debentures (NCDs) in January, ECL Finance Ltd has launched another NCD issue for public subscription starting on Friday, 12 June. The non-banking financial company (NBFC) is a part of Edelweiss Financial Services Ltd. It plans to raise `200 crore, with an oversubscription limit of another `200 crore, through the issue of unsecured, subordinated redeemable NCDs.

There are three series on offer. Investors can choose from monthly or annual coupon payouts and a cumulative option (no payouts during tenure; accumulated interest is paid out along with the capital at maturity). Maturity for all options is 70 months.

The bonds will be issued in both physical and dematerialized formats and are proposed to be listed on BSE Ltd. So, if you wish to sell before maturity, you can take the secondary market exit route.

Graphic: Prajakta Patil/Mint Risk assessment

The company is raising funds as part of tier II capital and hence, this issue is unsecured and part of subordinated debt. This means that bondholders will not get preference over secured or senior creditors in the event of default. It comes with a credit rating of CARE AA and BWR AA (Stable Outlook), which indicates high financial stability and high ability to fulfil financial obligations.

In the past few years, after utilizing other sources of finance, the NBFC has decided to explore public financing. “Eventually we plan to be well diversified on the funding side and can go up to 25% from retail funds,” said Rashesh Shah, chairman and group chief executive officer, Edelweiss. He indicated that any further fund raising through a public issue this fiscal year would depend on the credit growth in the coming months. Furthermore, it’s possible that the group’s housing finance company may also utilize this route for raising funds.

The management is not very concerned about the current issue being priced high and it adding to the cost of funds. The current issue forms a small part of its total loans of around `6,000 crore.

At present, the NBFC scores well on basic financial health parameters such as capital adequacy and non-performing assets, which, as on 31 March 2014, were below 0.35% of total loans. Its loan book and profit after tax grew around 25% and 33%, respectively, in FY14. However, the company is still in the growth phase, and the very nature of its business makes it vulnerable to macroeconomic influences. Its growth will be affected by the pace of recovery in gross domestic product (GDP) growth.

Should you invest?

A coupon of 12% per annum makes this issue attractive, especially for those in the 10% and 20% income tax brackets. This is more relevant now that bond yields have started to fall. For those in the 10% slab, post-tax annual returns, after cess and surcharge, will be 10.76% per annum, and 9.53% for those in the 20% tax bracket.

Invest in this if you want a regular income option such as monthly income. For an investment of `1 lakh, you can get `1,000 as monthly income. In the current scenario, the yield is attractive and if that’s what you are looking for, the cumulative option has a higher effective return. However, keep in mind that the issue is not secured against any assets.

The foremost factor is your or your adviser’s assessment would be the management quality and the company fundamentals. ECL is a well managed NBFC with strong financials and detailed risk management processes.

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