This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]
India Infoline Finance Limited (formerly known as India Infoline Investment Services Ltd.) will be launching its second issue of non-convertible debentures (NCDs) from September 5, 2012. To keep things absolutely clear right from the beginning, I’ll use IIFFL as the short name for this company as I want to distinguish this company from its well known listed parent company, India Infoline Limited (IIFL), and advise the readers not to confuse this issue as the issue launched by the parent company IIFL.
About India Infoline Finance Limited
India Infoline Finance Limited is a credit and finance arm of the IIFL group and provides loans against property, housing loans, gold loans, loans against securities/margin financing and medical equipment financing to the corporates, high networth individuals (HNIs) and retail clients. One of its subsidiaries, India Infoline Distribution Company Limited, is also engaged in the business of distribution of financial products like mutual funds, insurance products, company fixed deposits, NCDs, National Pension System (NPS), IPOs etc.
The company was originally incorporated on July 7, 2004 as a private limited company which leaves this company with a very short operating history and unproven business track record.
Financials of the company
During the year ended March 31, 2012, the loan book of the company stood at Rs. 6,746 crore as against Rs. 3,288 crore, an increase of approximately 105%. This jump has been achieved mainly on account of mortgage loans and gold loans which constitute approximately 45% and 41% of the total loan book respectively. The mortgage loan book is contributed by loan against property (LAP) at 89% and home loans at 11%. These figures suggest that the company is primarily focusing on gold loans as the new business segment and LAP in the housing loan segment.
IIFFL reported revenues of Rs. 953 crore in FY12 as against Rs. 520 crore in FY11, a jump of almost 83%. It also reported 76% increase in its net interest income (NII) to Rs. 412 crore in FY12 from Rs. 234 crore in FY11 mainly on account of a 105% increase in its lending book. Gross NPAs and Net NPAs of the company stood at 0.61% and 0.44% respectively as on March 31, 2012 as against 0.37% and 0.30% respectively as on March 31, 2011.
The company has made a significant branch expansion in the gold loan business last year which resulted in 79% increase in its operating costs to Rs. 297 crore in FY12 as compared to Rs. 166 crore in FY11. This resulted in a very tepid improvement of 14% in company’s net profit after taxes (PAT) which stood at Rs. 105 crore in FY12 as compared to Rs. 92 crore in FY11.
Here is the link to check the latest audited financial results of the company ending March 31, 2012.
About the NCD Issue
The size of this NCD issue is Rs. 500 crore including a green-shoe option of Rs. 250 crore. The company plans to use the proceeds for various financing activities including lending and investments, to repay existing loans, for capital expenditures and other working capital requirements.
The bonds offer a coupon rate of 12.75% per annum in three different options – payable monthly, payable annually and cumulative annually payable on maturity. Unlike Shriram Transport Finance NCD, this issue will not offer any additional incentive to the retail investors and the same rate of interest will be offered to all the categories of investors. This uniform rate of interest should make it attractive for the Category I – institutional investors and Category II – non-institutional investors. Under the cumulative interest option, the investors will get Rs. 2054.50 at the time of maturity. The maturity period in all the three options will remain 72 months only.
| Option | I | II | III |
| Rate of Interest | 12.75% | 12.75% | 12.75% |
| Interest Payment | Monthly | Annual | Cumulative |
| Effective Yield | 13.52% | 12.75% | 12.75% |
| Tenure | 72M | 72M | 72M |
| Redemption Amount | Rs. 1000 | Rs. 1000 | Rs. 2054.50 |
The interest earned will be taxable as per the tax slab of the investor but the company will not deduct any TDS on it as is the case with all of the listed NCDs taken in a demat form. The company has decided to keep the minimum investment requirement of Rs. 5,000 (or 5 bonds of face value Rs. 1,000) which has made it easily investable from the small retail investors’ point of view.
Like most of the NCDs, these bonds are going to list on both the stock exchanges – NSE and BSE. Investors will have the option to apply these bonds in physical form also.
25% of the issue is reserved for the “Reserved Individual Portion†i.e. for the individual investors investing up to Rs. 5 lakhs and another 25% of the issue is reserved for the “Unreserved Individual Portion†i.e. for the individual investors investing above Rs. 5 lakhs. 40% of the issue is reserved for the institutional investors and the remaining 10% is for the non-institutional investors. NRIs and foreign nationals among others are not eligible to invest in this issue. The allotment will be made on a “first-come-first-served†basis.
IIFFL is a relatively new company with a limited operational track record. The issue has been rated ‘AA-/Stable’ by CRISIL and ‘AA- (Stable)’ by ICRA. One notable point I want to emphasise here is that unlike last year and unlike all NCD issues of the past, these NCDs qualify as “Unsecured Redeemable Subordinated Debt†in nature or in other words, in the event of default, no charge upon the assets of the company would be created in connection with these NCDs.
I’ve picked this text from the DRHP
“The NCDs will be in the nature of subordinated debt and hence the claims of the holders thereof will be subordinated to the claims of other secured and other unsecured creditors of our Company. Further, since no charge upon the assets of our Company would be created in connection with the NCDs, in the event of default in connection therewith, the holders of NCDs may not be able to recover their principal amount and/or the interest accrued therein in a timely manner, for the entire value of the NCDs held by them or at all. Accordingly, in such a case the holders of NCDs may lose all or a part of their investment therein. Further, the payment of interest and the repayment of the principal amount in connection with the NCDs would be subject to the requirements of RBI, which may also require our Company to obtain a prior approval from the RBI in certain circumstances.â€
Though this feature should not make this issue an untouchable one to invest in but the investors should exercise extreme caution while investing in such issues as extreme adverse business conditions related to gold loan business or housing loan business might put IIFFL’s fortunes in trouble and it would become difficult for the investors to recover their hard earned money in the form of investment.
The issue closes on September 18, 2012.
Performance of the bonds issued last year
As I mentioned in the Shriram Transport Finance NCD post also, as many as ten such NCD issues had hit the markets last year issued by companies like Shriram Transport Finance, Shriram City Union Finance, Muthoot Finance, Manappuram Finance, Religare Finvest and India Infoline Investment Services Ltd. All the issues, except Shriram Transport Finance NCDs, listed at a discount and that too at a very deep discount of 5-8% in some cases. Many of them have still not been able to recover from those losses. They are yielding higher than 13% even now.
NCDs issued last year by IIFFL offering 11.90% coupon were secured in nature and are currently yielding 13.75% under the 60 months reserved individual option with the price quoting at Rs. 1001.10. It is the most traded option among all the options offered last year.
Next 20-30 days will witness three more such NCD issues seeking your investment offered by Shriram City Union Finance, Muthoot Finance and Religare Finvest. These companies have already filed their respective draft red herring prospectus (DRHP) with SEBI and almost all the regulatory formalities have been completed. Let us see how these NCDs perform once they get listed and if they are able to give any kind of much needed relief from the sinking stock prices or escalate our pain by listing at a discount again.
The issue has got oversubscribed on the 1st day itself. The oversubscription figure stands at 1.34 times. I don’t know if it is worth it or not but people are investing.
http://www.nseindia.com/marketinfo/ipochart/debt_ipochart.jsp?issue=IIFLFIN&ir=I&cn=c&sd=D&cnlink=N
Hi Shiv
can u suggest some bond funds will may be a better option for investors spl with a 2yr horizen
Hi gerard… I track some debt funds, out of which these two look good to me:
http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=682
http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=10317
One is a Gilt Fund and the other one is an Income Fund. They have their own risk factors and carry exit loads. Please do your own research before investing.
Why is it so hard to find the expense ratios of funds on the VRO site? I tried all the five tabs but couldn’t find the expense ratios. Do they deliberately try to hide it?
I don’t think that is the case with VRO. There is “Fund Category” under “Snapshot” of every scheme. It will take you to the page where all the schemes under that category are listed. There you can check the expense ratios of all these schemes. I think as the expense ratio is a relative expense they have listed all the expense ratios here on the comparison page. But I think VRO should list it on the scheme snapshot page also.
Dear Sir, I am working with LIC as an Insurance Advisor, sir I would like to know in deatails about the secured and unsecure NCD and one more thing that because of i am in investment profession, please guide me about the company Alchemist Infra Realty Ltd. Is it right for me to join there and investment public money. Thnx.
Hi Ranjit… Secured NCDs are backed by the assets of the issuer company and in case the company becomes insolvent, the investors can approach the bankruptcy court to get the assets liquidated to recover their investments. Unsecured NCDs don’t carry such backing. Its like one is a home loan and the other one is a personal loan.
We are not competent enough to answer your other query, sorry.
IIFL is it worth
http://www.moneylife.in/article/how-safe-is-india-infolines-non-convertible-debenture-issue/28264.html
Thanks Savio & Rakesh for the ICICI brokerage increase news.
Can I know how much are the other firms charging for as brokerage for NCD/Bonds investment to make a comparison?
I bought 10 shares of “SHRIRAM TRANSPORT FIN NU ” for 983 through sharekhan. I paid a total of 9842 (including all kinds of ST, stamp duty etc etc). So, total cost is 12/9830 = .12%
I had negotiated hard while opening my account with them. My brokerage is .10% for delivery. I hope they don’t increase it now.
ICICIDirect sucks.
Hi Biren… It is our effort here at OneMint to keep the readers updated with whatever we can, to the best of our abilities. It is very difficult for us to update an individual about the latest products being launched in the markets. I hope you understand.
You can subscribe to the newsletter here so that you keep getting the latest posts in your email whenever they are posted. Please keep giving your suggestions so that we can improve the contents here.
Hi,
In all articles I read that one can pick up a high YTM NCD (12% – 13% upwards) from the secondary market. But when I speak with my broker or check myself there is hardly any volume in such NCDs.
Can anyone guide me on this as I wish to invest some money in secured NCDs with high YTM.
Thanks.
Hi Prakash… Please check this link – http://www.edelweiss.in/Debt/DebtSnapshot.aspx?cn=IIFLFIN-N4
It is the Secured NCD issued by IIFFL last year with a coupon rate of 11.90%. 19,630 NCDs got traded today worth approx. Rs. 2 crore. There are many NCDs like these where volumes are low but significant enough for the retail investors to hunt for.
Thanks for the reply. I already have visited this link and even have it saved under favourites. But I don’t see much volume in the NCDs that are worth buying from secondary market from the point of view of good YTM returns as well as reliable company.
You wont easily find both the things simultaneously. The point is why would a reliable company offer 12-13% coupon or trade at 12-13% YTM?
You can get a YTM of around 10.40% on NCDs of IFCI, which has now become a government controlled company. These bonds carry a coupon rate of 10.75%. Please check this link:
http://www.bseindia.com/bseplus/StockReach/StockQuote/Equity/Ifci-d-1075-01-08-26-pvt/IFCI010811D/972657/COMPANY
But these bonds either lack liquidity or have very low liquidity.
Hello Shiv,
I read your review and the views expressed by others on the NCD issue by IIFFL. I had nearly decided till I read about the “sub-ordination debt” clause in above columns. I was naturally scared by the “sub-ordination debt” clause, and moreover the yield remains lower than 13%.
I would like to request you, to let me know about the forthcoming issues – either FDs or NCD’s like, since I want to invest about 2L. Alternatively you can suggest some other avenue/s.
Thanks in advance for your advise.
Withe Best Regards – Biren ( +91 99241 48964 )
Shiv – thanks for this post. It is one of the better written analysis.
You mentioned “Many of them have still not been able to recover from those losses. They are yielding higher than 13% even now.”
Where can i find these securities? I have a question about buying debentures. If a retail investor wants to buy listed corporate NCDs post-listing. How can he check quotes online? Equity quotes are easy. I understand that there is a liquidity issue with debt quotes and there may not be trades everyday – but what ticker should one look for, website link for bse or nse where quotes can be checked?
thanks,
– tapan
Hi Tapan… thanks a lot for your kind words!
I get most of the information I need about these NCDs from these two links:
http://www.nseindia.com/live_market/dynaContent/live_watch/equities_stock_watch.htm?cat=SEC
http://www.edelweiss.in/Debt/DebtSnapshot.aspx?cn=SBIN-N5
For NCDs listed exclusively on the BSE, you need to know their respective ‘Security Codes’.
Yes, you are right, there are liquidity issues with some of these NCDs. One should buy those securities where trading volumes are good enough to liquidate his/her holdings in case of urgent fund requirements. You need to check different series of an issuer to have an idea about it.
is NCDs monthly/yearly/annually payout is gauranted whatsoever market is…….
Hi… The rate of return of 12.75% is ‘fixed’ throughout the tenure but not ‘guaranteed’. Till the time IIFFL does not default on the interest payments, it will keep giving 12.75% p.a. It does not depend on the stock markets but overall condition of the economy and the company’s financial health.
In their loan book composition, mortgage loans is highest 45%. This is a highly competitive business, most likely their lending rate will be lower than their cost of funding, so negative proposition. Next highest is gold loans at 41% of loan book, where they do not posses any distnict competitive advantage vis-a-vis pure play gold loan companies, besides the sector is witnessing diminishing growth. Btw, are RBI’s stricter norms on gold loan co’s (with regard to LTV, max exposure etc) also applcibale to IIFL or only muthoot, manappurm?. If not, then it could be a breather
Hi Ankur… One notable thing about their mortgage loans is that about 89% of the mortgage loans are LAP which carry a higher rate of interest than home loans. So this is a positive for them and probably makes their lending rate (including other misc. charges) higher than 12.75% or so.
You are right in your 2nd observation. Please check ICRA’s observations from the DRHP – “IIFL has expanded its branches for gold financing to ~1300 as on Mar-12 and has also hired aggressively to staff the new branches. Given that the company has recently forayed in this business and rapidly expanded its footprint; the operating expenses on account of this business is higher than industry average and accordingly the return on assets is lower than industry average. ICRA has also taken note of lower business volumes in gold loans as a result of regulatory changes, which has capped the incremental LTVs at 60% for NBFCs. Accordingly; the profitability of gold loan business is expected to get moderated with lower disbursements. However, the company has significantly scaled down its branch expansion plans and is looking to leverage its existing branch network to cross-sell mortgage loans
and other distribution products (mutual funds, insurance etc) for attaining better efficiencies.”
I was reading a doc having FAQs on this NCD issue and it took me by surprise when I read this:
“Q3. Does the instrument become riskier because it is sub-ordinated debt or because it is unsecured?
Ans: Sub-ordination or no security does not make the instrument riskier in any way. Subordination or no security impacts the instrument only in case of default by the issuer company and liquidation of its assets.”
I want to ask these guys “how it does not make the instrument riskier in any ways?????” Default Risk by definition arises in case of default by the issuer company. If the invetors dont have any recourse against any of the assets of the company then what do they have to claim for in case of any default? Then their whole investment is gone. It is worrisome that how openly they are trying to fool the investors.
Ya, actually the risk is not appropriately included. Infact for unsecured bonds, they should infact be offering 14% yield.
Hi Shiv,
While I agree with you that since this is sub-ordinated debt, it is more risky, I do not agree with the statement “the invetors dont have any recourse against any of the assets of the company”. In fact in case of a default, the lenders (investors) have recourse to recover their investment. However, since its an unsecured sub-ordinated debt, the investors claim to the assets have a lower preference or priority compared to other lenders. In fact, it holds the last preference.
What happens in case of a default is that the lenders take legal recourse. The assets of the company are liquidated. Some of the loans are secured and they are secured against assets of the company. For example, if the company took secured loans to buy buildiing space for their operations, they would have mortgaged the building to a lender A. At the time of liquidation, the first right over the buiding will go to lender A. If after selling the building, lender A is able to recover its investment, the remaining proceeds will go to other investors (including other secured debt, unsecured debt, and sub-ordinated debt). If however, after selling the building space, lending A is not able to recover its investment, it still has a claim over other assets of the company.
The example given above is a very simplified one. The actual liquidation is much complex where the court decides on the distribution of the proceeds from sale of assets. However, the point is that holders of unsecured sub-ordinated debt do have rights over the assets of the company, however their claim is the last.
Hi Devdatta… I agree with what you have stated here. I had no intention to claim that the investors of IIFFL Unsecured NCDs would have nothing to claim against in case of company’s failure to fulfil its obligations. I was objecting to the FAQs doc which had stated “Sub-ordination or no security does not make the instrument riskier in any way”. To which I dont agree and wanted to say it makes quite a significant difference. That is why “If” was used in the above statement.
Secured NCDs are backed by some specific assets of the issuer and are attached to that specific issue of NCDs. If the value of these specific assets fall below the outstanding liability of the issuer for this specific issue, then these secured lenders will fall in line with the unsecured lenders but still have a higher claim.
The main issue is unsecured nature of instrument, which makes it less safe vs listed secured bonds. The only advantage is monthly interest payment which makes effective yield higher. But think about it, the company is raising at 12.75%-13.5% which along with intermediary costs, would make their cost of funding at 13-14%. With such high cost structure, can they enjoy decent NIMs in a falling interest rate scenario, as their assets would be floating rate (int income will fall), while liability would be fixed rate.
I agree with you Ankur it is a very high cost of funding at 13-14% even if the intermediary marketing costs are spread out over a period of next 72 months. As per the DRHP, their “Yield on Earning Assets” for FY12 was 16.76% and the “Cost of Funds” was 11.26% which makes “Net Interest Spread” to be 5.49%. It was 4.88% in FY11 and 7.49% in FY10. The point is how they are able to generate such a high yield on their ‘secured’ lending portfolio of gold loans, LAP, home loans, LAS etc. I think their portfolio of customers is not of a very high quality and NPAs will rise in case gold prices or housing prices correct some time in future.
Also, even before factoring this issue, their Debt Equity Ratio has jumped to 4.16 in FY12 from 1.71 in FY11 and 0.81 in FY10. This figure is also a very high no. and soon they’ll be required to raise equity in order to lower it down.
Coupon rate is 12.75% and for the yield to effectively become 13.52% the investors need to invest the monthly interest at 12.75% only, which is a very difficult task to do. So the investors should focus on 12.75% and ideally opt for the monthly interest option if they decide to invest in it.
Even if you can re-invest monthly coupons (of 10.62 per bond) @ 9%, your IRR will be 13.29%, which is much better than annual yield of 12.75% (13.22% IRR if reinv rate is 8%) Plus by avoiding concetration of repayments, the exposure to credit risk is lower. So chosing the monthly interest is a no brainer.
Hi Shiv,
It was really interesting and enlightning to read your post about this issue and even the comments which followed.
Well! I am planning to put 20% of my allocated money for an NCD, in this issue of IIFFL.
I am normally of the view of opting for the cummulative interest option along with the physical bond certificate, and not to go for any trading in between the tenure. Basically having them as a fixed debt investment. And same I’m thinking for this one as well.
I am seeking your view upon this, as you mentioned above, ‘the investors should focus on 12.75% and ideally opt for the monthly interest option if they decide to invest in it’.
As I will not be investing the monthly interest pay-out again to reach that yield, wouldn’t it be better get it double by the end of 6 years?
Hi Saurabh… Normally it is a good idea to have the cumulative option if the interest rate is high, you want to get rid of the headache of reinvesting the interest amount, credit risk is minimal and the compounding frequency is the same as the payment frequency.
With IIFFL, interest rate is high and probably you don’t want to carry the burden of reinvesting the interest amount. But, as Ankur pointed out above, you need to minimise concentration of repayments by getting the monthly interest paid.
Also, the option of getting Rs. 2054.50 per Rs. 1000 invested in 6 years involve annual compounding and not monthly. Had it been monthly compounding then you would have got Rs. 2140.34 after 6 years. So, personally I would have gone for the monthly option, only if I were to invest in this issue.
By the way, dont invest in this issue now as it has already been oversubscribed and if you invest now you will not get any allotment.
Thank You! 🙂
You are welcome! 🙂
You wrote – “NCDs issued last year by IIFFL offering 11.90% coupon were secured in nature and are currently yielding 13.75% under the 60 months reserved individual option with the price quoting at Rs. 1001.10.” -I think your calculation of the yield is wrong
Hi tanerooooo… how much the yield should be as per your calculation? Please show your calculation if possible.
i am planning to give this a miss due to it’s Unsecure Nature. Seeing the current Economic Condition I believe the coming days will still be little tough and hence it is little more risky to go for these type f bond.
Yes its true, ICICI direct has increased the brokerage for NCDx/Bonds- upto 1% also – which makes impossible to trade in and at the same time for investment purpose – one will lose 2% straight way if they buy from secondary market.
Thanks Rakesh for this info! It would be great if you can share the text of their notification so that we have more clarity regarding the same.
Please find herewith text of circular sent to the customers of ICICI direct.
“We would also like to inform you that with effect from July 10, 2012, the following modifications in our brokerage structure for NCDs / Bonds would be applicable:
Amount # Tenure *
Below 5 Yrs Above 5 Yrs
Less than or Equal to 1 Cr0. 0. 75% 1.00%
More than 1 Cr, Less than 5 Cr0 0 .50% 0.75%
5 Cr and above0 0.50% 0.50%
Subject to Minimum brokerage of 20/- per NCD/Bond per day. Please note that for Spot trades, a flat brokerage of 1.25% will be charged.
# No Brokerage will be charges on square off leg on the same day. Further, value of such trades will not be considered for determining brokerage slabs.
* Time to maturity. “
Thank you Rakesh for sharing this text! That means for all of the tax-free bonds which have a tenure of 10 years or 15 years, ICICI Direct will charge a brokerage of 1%. Even for this issue it will be 1% for the next 1 year till the time its time to maturity falls below 5 years. Not good for the investors and the NCDs market.
For those investing in these NCDs through ICICIDirect in the secondary market (which means post listing) be aware that they have suddenly hiked their brokerage rates to as much as 0.75% for NCDs.
This can definitely eat into your profits.
Oh really ??… then it must be applicable to all of the listed NCDs. I think it is not fair to do so!! Other brokerage companies will also try to hike their charges, which will result in lower than usual trading volumes in all these NCDs. It would be bad for the corporate bond markets. Thanks Savio for this info!
I am surprised that their NPA is so low – compared to say SBI
Hi Vivek… Most of their loans are secured loans – gold loans, LAP, home loans, loans against securities etc. They are not into credit cards, stopped giving personal loans in FY09, dont give farm loans where govt. wakes up some day and ask banks to forgive/restructure these loans to capture farmers’ vote bank.
Moreover, they have started giving majority of their gold loans last year itself. I would say this company is playing it very cautiously and yet to become fully operational in a true sense as this company moves whichever side the wind starts flowing. One should not compare NPAs of this company with that of the SBI.
Absolutely agree with you Manshu. Do post a comment once these get listed. Thx.
I’d much rather wait till the listing before investing in this and even then see if I can get a higher yield elsewhere since there are so many options open right now.
Hi Manshu… my point is even if I am comfortable with the business model, financials and the management of IIFFL and decide to invest in their NCDs, why should I go for this issue of “Unsecured Subordinated Debt” nature when I’m getting a higher yield of 13.75% in its last year’s “Secured NCDs”. This clearly suggests that these NCDs should ideally yield higher than 13.75% on listing which means a huge discount of at least Rs. 50 over its issue price of Rs. 1000.
hi sir i want to know about IIFL NCD IS THIS SECURED NCD OR NOT FOR RETURN 12.75 IN 6 YEAR PLZ SUGEST ME.IM I INVEST OR NOT IN THIS
Hi gautam… These NCDs are ‘unsecured’ in nature and qualify as ‘Subordinated Debt’ of the company. I’ve analysed the issue for the readers here to the best of my abilities, it is your personal choice whether you want to invest in these NCDs or not.