Category: Investments

The market hit a new all time high last week, and it is natural for people to wonder if they should do anything differently now that the market has reached such levels.

 

What you should do really depends on what kind of investor you are. If you are the kind that has never invested in the market, and is asking if this is a good time to begin, then I can tell you with certainty that the best time to invest is when the market is down, not up, and also that this advice is almost impossible for anyone in your situation to follow.

So, for all practical purposes, for you, this time is as good as any to begin investing in the market.

For others like me who have been in the market for longer, and are simply wondering if it is time to book some profits or exit out of the market completely, I can share what my thought process is and then you can decide if it makes sense to you or not.

When I  read about the market making all time highs, my first reaction was – sure – all time nominal highs, but not really real highs are they?

I say that because there has been widespread inflation, companies have increased prices, their nominal profits have increased so it is only natural that the index value increases at some point to match those increased nominal values.

To see if this is really the case I took a look at the Nifty P/E levels for the past few years, and here’s a chart based on NSE data.

As you can see the market has been here several times before, and we are not even up to the average of yesteryears which is around 19. So, although the market has made a nominal high, you can’t really say that the market has moved to irrational or that the index is at unjustifiable levels.

For a long term investor like me, I am happy to see the markets do well but this doesn’t prompt any change to my investing game plan right now. I will continue to invest more money, while adding to my cash reserves because I love to deploy the bulk of my money during crashes, but I don’t see myself booking any profits right now just because the market has made nominal highs.

 

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]

With the current financial year coming closer to an end, the investors, waiting to deploy their cash surplus or maturity proceeds from their other investments into tax free bonds, are currently spoilt for choice. There are as many as five tax free bond issues currently open and the much awaited NHB issue is getting open for subscription tomorrow i.e. March 7.

As expected, it is carrying the highest rate of interest among the ‘AAA’ rated issues which are currently open – 8.93% p.a. for 15 years, 8.90% p.a. for 20 years and 8.50% p.a. for 10 years.

Size & Closing Date of the Issue – NHB’s first issue in December was of Rs. 2,100 crore and it got subscription to the tune of Rs. 4,366.43 crore on the first day itself. Though the current issue is scheduled to close on March 18, going by the issue size of Rs. 1,000 crore, I think it too should get oversubscribed on the first day itself.

So, in order to avoid rejection of their applications, I would advise the interested investors to apply for these NHB bonds on the first day itself. In case of oversubscription on the first day, the applicants will get allotment on a pro rata basis.

NRI/Foreign Portfolio Investment – Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs) and Qualified Foreign Investors (QFIs) are not eligible to invest in this issue.

Investor Categories & Allocation Ratio – Once again the investors have been classified in the following four categories and each category will have certain percentage of the issue size reserved during the allocation process:

Category I – Qualified Institutional Bidders (QIBs) – 10% of the issue i.e. Rs. 100 crore is reserved

Category II – Non-Institutional Investors (NIIs) – 25% of the issue i.e. Rs. 250 crore is reserved

Category III – High Net Worth Individuals including HUFs – 25% of the issue i.e. Rs. 250 crore is reserved

Category IV – Resident Indian Individuals including HUFs – 40% of the issue i.e. Rs. 400 crore is reserved

Allotment on First Come First Served Basis – Subject to the allocation ratio, allotment will be made on a first come first serve (FCFS) basis in each of the investor categories, based on the date of upload of each application into the electronic system of the stock exchanges. As mentioned above, allotment will be made on a pro rata basis for that day on which the concerned category gets oversubscribed.

Rating of the Issue – Investors seeking safety of their capital give high importance to the credit rating of an issue. This issue has been rated ‘AAA’ by CRISIL, ICRA and CARE. Instruments with ‘AAA’ rating are considered to have highest degree of safety regarding timely servicing of financial obligations.

Lock-in Period & Premature Redemption – There is no lock-in period with these bonds, but at the same time, you cannot redeem these bonds back to the company before their maturity period gets over. In order to encash your investment before maturity, you’ll have to compulsorily sell these bonds on the National Stock Exchange (NSE) where these bonds will get listed for trading.

Demat/Physical Option – Though it is mandatory to have a demat account to sell/trade these bonds, you can subscribe to them in physical/certificate form as well. Interest payment will still get credited to your bank account through ECS.

Interest on Application Money & Refund – As always, NHB will pay interest to the successful allottees on their application money, from the date of realization of application money up to one day prior to the deemed date of allotment, at the applicable coupon rates. Unsuccessful allottees will get interest @ 5% per annum on their refund money.

Minimum Investment – As NHB has kept the face value of its bonds unchanged at Rs. 5,000, an investor is required to apply at least one bond in this issue i.e. minimum investment of Rs. 5,000.

Interest Payment Date – NHB has not fixed its interest payment date this time as well and its first due interest will be paid exactly one year after the deemed date of allotment.

Which issue should I invest in?

When I covered NHB’s first issue in December, I mentioned certain points to express my views. Let me mention those points again and express my current views regarding those points:

First, NHB issue is ‘AAA’ rated.

Current View: There is no change in NHB’s credit rating for this issue as well. So, I think it remains a good issue to invest rating wise.

Second, you are going to get 9.01% p.a. and 8.88% p.a. coupon rates which are the best 20-year and 15-year rates offered by any AAA rated or AA+ rated issuer till date.

Current View: NHB offered 9.01% p.a., 8.88% p.a. and 8.51% p.a. for the 20-year, 15-year and 10-year options respectively. These respective rates stand as 8.90% p.a., 8.93% p.a. and 8.50% p.a. this time around, which makes the 15-year option to be the most attractive for a retail investor.

Third, NHB is a wholly-owned subsidiary of the RBI and I don’t foresee the RBI to ever let its subsidiary default on any such bond issue. Also, NHB is the regulator of the housing finance companies, like RBI is for the banks and SEBI is for the capital markets. I don’t think any government would allow any regulator to default on its payments.

Current View: I think there is no need to change my earlier view as far as this point is concerned.

Fourth, it is almost certain that the CPI inflation will start falling from next month onwards. If that materialises, we might have G-Sec yields falling quite sharply.

Current View: Though there has been a sharp fall in the CPI as well as the WPI inflation January onwards, but unfortunately, G-Sec yields have not fallen in line with the inflation numbers. There have been many factors behind it – high fiscal deficit, high debt levels of the government, unexpected Repo Rate hike & start of inflation targeting by the RBI in its January policy, uncertain political & economic policy environment in the short term and the government’s unrealistic fiscal deficit target for the next fiscal year.

I think the G-Sec yields should move in a broad range till the time we have a stable government at the centre. If we have a sharp fall in the inflation numbers and controlled government expenditure in the next few months, we can expect G-Sec yield to fall sharply if we get a strong and stable government in May.

Fifth, IRFC is the next company to launch its tax-free bonds from January 6 and its coupon rates are lower than that of NHB at 8.48% p.a. for 10 years and 8.65% p.a. for 15 years. It is not going to issue these bonds for 20 years either.

Current View: There are five issues currently open, out of which three issues are ‘AAA’ rated, one is ‘AA+’ and one is ‘AA’ rated. As this ‘AAA’ rated NHB issue is offering the highest rate of return as compared to the other ‘AAA’ rated issues, I expect a very good response from the institutional as well as the retail investors.

Sixth, there are very few good companies left now to issue tax-free bonds this financial year. REC, PFC, NHPC and NTPC have already raised their quota of authorised amount from the markets. HUDCO is also very close to reach its targeted amount. Only IIFCL, NHAI, IREDA, Airport Authority of India (AAI), Ennore Port and Cochin Ship Yard are now left to issue these bonds and their issue sizes are also very small, except NHAI and IIFCL.

Current View: IRFC today extended the closing date of its current issue from March 7th to March 14th. Also, as AAI issue is not expected in the current financial year and Cochin Ship Yard is yet to file the prospectus for its issue, I think this NHB issue should be the last public issue of the current financial year.

Seventh, it is still not certain whether tax-free bonds would see the light of the day next financial year onwards or not. Like 80CCF infrastructure bonds got stopped getting issued from FY 2012-13 onwards, it is possible that the next government decides to stop extending this budgetary support to all such companies.

Current View: I think there is no need to change this view as well. You might not have tax free bonds available for subscription next financial year, in which case you will see a good demand for these bonds in the secondary markets.

Eighth, NTPC issue got listed a few days back and that too at a premium. If an issue with coupon rates lower than the NHB issue can trade at a premium, then it is almost certain that these NHB bonds would also trade at a premium on listing.

Current View: It has been the case with most of these issues in the current financial year. Most of these bonds have been trading at a premium and I expect NHB bonds also to list at a premium in the current interest rate scenario.

Ninth, NHB has reasonably strong fundamentals. It reported profit after tax (PAT) of Rs. 450 crore with total income of Rs. 3,030 crore for the period ended June 30, 2013 as against Rs. 387 crore and Rs. 2,492 crore respectively for the period ended June 30, 2012. Its net interest margin (NIM) also improved to 2.25% during this period as against 2.20% last year.

NHB’s asset quality has also been remarkable. Gross NPAs and Net NPAs remained quite close to zero for the periods ended June 30, 2011 and June 30, 2012. Though its gross NPAs and Net NPAs have jumped to 0.53% and 0.45% respectively in the latest period ending June 30, 2013, this relative poor performance was due to one large project exposure slipping into the NPA category. This large account was worth Rs. 179.60 crore out of its total NPAs of Rs. 180.62 crore.

Current View: There is no change in my view as far as NHB’s fundamentals are concerned.

Why you should not invest in this issue?

If I myself decide not to invest in this issue, I would have only one valid reason for that, higher expected coupon rates in the forthcoming issues. If any of you think that the rates would be higher with NHAI bonds or IIFCL tranche III bonds, then you can probably skip this issue. Personally, I would invest my family’s money in this issue and would also advise my clients to do that.

Current View: Last time I had only one reason. This time I don’t have any reason for me not to invest in this issue, except that I don’t have enough money for me to fully utilise Rs. 10 lakh limit applicable for a retail investor.

Application Form of NHB Tax Free Bonds

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in NHB tax-free bonds, you can contact me at +919811797407

I just finished reading Warren Buffett’s 2014 annual letter to shareholders, and he has devoted a section to investing in common stocks in it which is titled “Some Thoughts About Investing”.

The section is a great read for any long term equity investor, and I’m going to excerpt the part where he lists down lessons for investors.

I tell these tales to illustrate certain fundamentals of investing:

• You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
• Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
• If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
• With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
• Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)
• My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following – 1987 and 1994 – was of no importance to me in making those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.

 

I think the two factors that I’ve had most trouble dealing with are the following:

1. Ignoring the macro situation: There hasn’t been a panic in the markets for a while now so it’s easy to forget how these situations look like but if you remember the last panic or the one before it — the biggest thing that stands out from them is how hard it is to ignore all the doomsday predictions and focus on investing.

Even without panic, it is hard to ignore things like say the election results, and say that you will invest no matter what the outcome of elections are, and that in no way will influence your investing decision. It’s hard but it is precisely what needs to be done. The people who have benefitted the most from the stock market are the ones who remained invested, and continue to invest more when the markets crashed. It is just the nature of the market to over-react at both extremes, and if you comprehend that and position yourself to take advantage of that then you can take advantage of the macro situation.

2. Valuing an asset: The other difficult thing I find is to value stocks, and there are several ways to value a stock but how do you know that you have accounted for all important factors in your valuation and you’re making the correct assumptions?

There is simply no way to make sure that you have done all this, and that’s precisely why so many professionals fail at this. The best that you can do is to pick a simple measure, use that consistently, ensure that you have plenty of margin built into your calculation, diversify, and give yourself a lot of time. What I usually do is look at free cash flow, and then calculate the value based on how much free cash flow the company is generating, and that’s proved to be an easy measure for me. Sometimes I invest in stocks that don’t have any free cash flow, and in those cases I have to look at other measures, but the point I’m trying to make is you can use a simple measure for doing these type of calculations, and also that you have to value a stock like you value a business, and that exercise in itself will save you from investing in a lot of bad companies that have bleak prospects.

Equity investing is not for everyone, but for the people who want to invest directly in stocks, there are some great lessons to be drawn from investors like Warren Buffett, and learning from the experiences they’ve had.

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]

Three tax free bond issues are getting launched from the coming Friday i.e. 28th of this month. These are from IRFC, REC and HUDCO. While IRFC and REC issues are ‘AAA’ rated, HUDCO issue is ‘AA+’ rated. As most of you are aware by now, issues which carry higher ratings also carry lower coupon rates. So, it is natural for the IRFC and REC issues to offer lower rate of interest.

While HUDCO has been able to offer 8.98% as its highest annual interest rate, the same stands at 8.88% for the other two issues. As the HUDCO issue is of Rs. 285 crore only, which is very small by its standards, I expect the issue to get oversubscribed on the first day itself. This makes me feel like that the investors would be more interested in a comparison between the IRFC and the REC issues. So, I would like to cover such a comparison in this post.

Size of the Issues – IRFC issue is bigger in size with the company planning to raise approximately Rs. 2,916.88 crore this time around, whereas REC has recently got the authorization to raise another Rs. 1,059.40 crore. Both the companies have reserved 40% of their respective issue sizes for the retail investors.

Closing Dates of the Issues – REC issue is scheduled to close on March 14, whereas IRFC has decided to keep it extremely short to close it on March 7.

20-Year Option – REC will offer 8.86% per annum for the 20-year option, whereas the IRFC issue will not carry the 20-year option. For the other two durations, both companies are offering the same coupon rates.

Ratings of the Issues – As mentioned above also, both these issues are ‘AAA’ rated. While the IRFC issue is rated by CRISIL, ICRA and CARE, the REC issue is also rated by these three rating agencies in addition to India Ratings as well.

Investor Categories & Allocation Ratio – As always, the investors have been classified in the following four categories and each category will have certain percentage of the issue sizes reserved during the allocation process:

Category I – Qualified Institutional Bidders (QIBs) – IRFC – 10% of the issue i.e. Rs. 291.69 crore is reserved; REC – 10% of the issue i.e. Rs. 105.94 crore

Category II – Non-Institutional Investors (NIIs) – IRFC – 30% of the issue i.e. Rs. 875.06 crore is reserved; REC – 25% of the issue i.e. 264.85 crore is reserved

Category III – High Net Worth Individuals including HUFs – IRFC – 20% of the issue i.e. Rs. 583.38 crore is reserved; REC – 25% of the issue i.e. 264.85 crore is reserved

Category IV – Retail Individual Investors (RIIs) – IRFC – 40% of the issue i.e. Rs. 1,166.75 crore is reserved; REC – 40% of the issue i.e. Rs. 423.76 crore is reserved

As always, allotment will be made on a first come first serve (FCFS) basis in each of the investor categories.

NRI/FPI/QFI Investment – Both the companies have allowed Non-Resident Indians (NRIs) to participate in their respective issues, on a repatriation basis as well as on a non-repatriation basis. Qualified Foreign Investors (QFIs) category has been recently merged with the FIIs category to form a new category termed as Foreign Portfolio Investors (FPIs). FPIs have also been allowed to invest in these bonds now.

Listing – IRFC has decided to get its bonds listed both on the National Stock Exchange (NSE) as well as on the Bombay Stock Exchange (BSE), whereas REC bonds will get listed only on the BSE.

Interest on Application Money & Refund – Both the companies will pay interest to the successful allottees on their application money at the applicable coupon rates. Unsuccessful allottees will get interest @ 5% per annum on their refund money.

Interest Payment Dates – IRFC will pay the due interest on April 15th every year, whereas REC has fixed its interest payment date to be December 1st every year.

Though it is very difficult to make out which issue is superior between the two, I would personally prefer the IRFC issue due to its business fundamentals, bigger issue size and listing of its bonds on both the stock exchanges. But, if you have already invested with either of these companies earlier, then I think it would be better to go for the other company’s bonds in order to diversify your bond portfolio.

I would also like to wait for the NHB issue to declare its coupon rates sometime early next week. If NHB’s interest rates are higher, then I would rather prefer to go with the subsidiary of the central bank rather than these public sector enterprises.

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]

Starting with IRFC and HUDCO issues from 28th February, the stage is set again for a large number of companies to issue their tax free bonds and fight with each other to get a slice of your investment pie. With IREDA, IIFCL and Ennore Port struggling to meet their targets of sourcing allocated quotas of money from the investors, National Housing Bank (NHB), Rural Electrification Corporation (REC) and National Thermal Power Corporation (NTPC) have got the requisite nod to again hit the streets with their additional issues.

Interest Rates on Offer – As the IRFC issue is rated ‘AAA’ and the HUDCO issue is rated ‘AA+’, there is a difference of 10 basis points (or 0.10%) between their respective interest rates. So, for the 10 year maturity period, IRFC issue will offer 8.44% per annum rate of interest, whereas HUDCO bonds will carry 8.54% per annum.

With the 15-year option, HUDCO will offer 8.98% p.a. which is very close to the psychological mark of 9% and the IRFC issue carries 8.88% p.a. For 20 years as well, HUDCO’s rate of interest @ 8.96% p.a. is very close to its 15 year rate. But, as with its last issue, IRFC has decided not to offer the 20-year option this time as well.

Though NHB, REC and NTPC are yet to file their final prospectus with SEBI and declare the coupon rates they will be offering, market participants are expecting the rates to be very close to the rates IRFC issue is carrying. I’ll update their rates as soon as I hear them from a reliable source.

Issue Opening Dates – While it is confirmed that IRFC and HUDCO issues are getting opened on the last day of this month i.e. February 28th, the coming Friday, NHB and REC issues are expected to open from March 3rd. There is no info with respect to the NTPC issue. I’ll cover these issues as soon as I get the required info.

Size of these Issues – While NHB had sought a permission to raise an additional Rs. 1,000 crore from the markets, the same stands at Rs. 1,000 crore for REC also and Rs. 500 crore for NTPC.

Also, while HUDCO will raise the remaining Rs. 285 crore of its allocated amount, IRFC will try to raise approximately Rs. 2,917 crore, which I think is a difficult task in this competitive market and that too, in a very short span of time the issue will remain open for.

(Figures are in Rs. Crore)

Issue Closing Dates – One thing which has really really surprised me are the closing dates of IRFC and HUDCO issues. With an issue size of just Rs. 285 crore, HUDCO has fixed its issue closing date to be March 19th, whereas IRFC has decided to keep its issue open for 5 working days only to close it on March 7th. I am wondering whether IRFC is too optimistic or HUDCO is too pessimistic to raise their respective targeted amounts. I hope IRFC will again extend its closing date if it is not able to complete its task in this short period.

Thanks to high inflation and the government’s high fiscal deficit and uncertain economic policies, interest rates here in India have remained high throughout during the current financial year. This has helped the investors in earning higher interest rates and the companies to easily raise money from the investors.

With NHB and NTPC bond issues coming again, the investors, who earlier missed their issues, will have the opportunity to now participate in these offers. As the demand is expected to remain strong for these issues again, the investors would do well to keep their funds ready and invest on the first day itself to avoid rejection of their investment applications.

Update 1 – REC issue will also open on February 28th and the coupon rates are – 8.41% p.a. for 10 years, 8.88% p.a. for 15 years and 8.86% p.a. for 20 years. Issue will get closed on March 14.

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 Infrastructure Finance Company Limited, commonly known as IIFCL, has launched the third tranche of its tax-free bonds from Monday i.e. February 17. I know I am late in covering this issue, but I was undergoing some rigorous travelling over the weekend and also, my train back to Delhi got approximately 16 hours late. It was supposed to reach New Delhi Railway Station (NDLS) early morning on Monday at 07:20 but it actually reached the destination at 23:00 hours.

Getting over with the painful experience I had, I am back with this review. So, this is the third and most likely the last public issue of tax-free bonds by IIFCL for the current financial year. The company has already raised Rs. 7,176.21 crore through private placements and tranche I and tranche II of its earlier public issues. So, whatever is left over from its authorised limit of Rs. 10,000 crore, IIFCL has set that figure as its target to be raised in this public issue i.e. Rs. 2,823.79 crore.

The issue will remain open for subscription for almost a month to close on March 14. Here are the issue details which might interest you as an investor:

Rating of the Issue – Four rating agencies, ICRA, Brickwork Rating, CARE and India Rating, have rated this issue and as with its previous issues, this issue is also ‘AAA’ rated.

Coupon Rates on Offer – Interest rates, which this issue of IIFCL carries, are absolutely same as the rates which IREDA is offering i.e. 8.80% per annum for the 15 and 20 year options and 8.41% per annum for the 10 year option. As both these issues are ‘AAA’ rated, their interest rates are 20 basis points (or 0.20%) lower than the ‘AA’ rated rated Ennore Port issue.

NRI/QFI Investment – Non-Resident Indians (NRIs) as well as Qualified Foreign Investors (QFIs) are not eligible to invest in this issue.

Investor Categories & Allocation Ratio – The investors have been classified in the following four categories and as always each category will have certain percentage of the issue reserved during the allocation process:

Category I – Qualified Institutional Bidders (QIBs) – 15% of the issue i.e. Rs. 423.57 crore is reserved

Category II – Non-Institutional Investors (NIIs) – 20% of the issue i.e. Rs. 564.76 crore is reserved

Category III – High Net Worth Individuals including HUFs – 25% of the issue i.e. Rs. 705.95 crore is reserved

Category IV – Resident Indian Individuals including HUFs – 40% of the issue i.e. Rs. 1,129.52 crore is reserved

Allotment on First Come First Served Basis – Subject to the allocation ratio mentioned above, allotment will be made on a first come first serve (FCFS) basis in each of the investor categories, based on the date of upload of each application into the electronic system of the stock exchange.

Listing – These bonds from IIFCL will get listed only on the Bombay Stock Exchange (BSE) and that too within 12 working days from the closing date of the issue.

Interest on Application Money & Refund – As with most of these issues, IIFCL will also pay interest to the successful allottees on their application money at the applicable coupon rates, from the date of realization of application money up to one day prior to the deemed date of allotment. Unsuccessful allottees will get interest @ 5% per annum on their refund money.

Interest Payment Date – Interest payment date in this case is linked to the deemed date of allotment and that is why it is yet to get declared. Once the allotment gets done, I’ll update it here on this post itself and also the one which carries the interest payment dates of all the bonds which have got issued during the current financial year.

Demat not Mandatory – As most of the investors are aware, investment in these tax-free bonds don’t require you to mandatorily have a demat account to apply for these bonds. You may subscribe to them in certificate form as well like a fixed deposit. and can get them converted to demat form whenever you want.

Lock-in Period, Premature Redemption – As these are not any tax saving bonds, there is no lock-in period with these bonds and if you take these bonds in your demat account, you can sell them whenever you want on the BSE once they get listed for trading. But, if you take these bonds in physical/certificate form, you cannot redeem these bonds back to the company before their maturity period gets over.

Among the three issues which are currently open for subscription, I would personally prefer the IIFCL issue the most, the IREDA offer as my second option and the Ennore Port issue I would give it the third rank. But, in order to diversify their tax free bonds portfolio, I think the investors would like to give this issue a miss as they might have already applied for the IIFCL bonds in its previous offerings.

Application Form of IIFCL Tax Free Bonds

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in IIFCL tax-free bonds, you can contact me at +919811797407

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]

As the IREDA issue is set to open for subscription on Monday, Ennore Port has decided to give it a competition by offering interest rates which are 20 basis points (or 0.20%) higher than the rates IREDA is offering. But, most importantly the Ennore Port issue is ‘AA’ rated as compared to the IREDA issue which is ‘AAA’ rated.

Had it been a case of comparing NCD issues of two private companies, I would have definitely and completely avoided the ‘AA’ rated issue. But, in case of two government owned companies, the matter becomes a little trickier and a close analysis is required to take your final decision. I’ll try to do the same here in this post.

The issue is slated to open for subscription from Tuesday i.e. February 18th and will get closed on March 14th, if it remains undersubscribed till that time and the company decides not to extend the closing date.

Size of the Issue – Ennore Port has been authorized to raise Rs. 500 crore from tax free bonds this financial year and the company plans to mop up the entire amount from this issue itself, including the green shoe option of Rs. 250 crore.

Rating of the Issue – I think this would be a concern area for most of the investors despite of the fact that it is offering relatively higher rate of interest. The issue has been rated ‘AA’ by two credit rating agencies, CARE and ICRA.

Like all other tax free bond issues, these bonds are also ‘Secured’ in nature and certain assets of the company, located within the port limits of Latitude 13? 17’ 36” North and Longitude 80? 20’ 51” East, along with the right to occupy and use the land over which the assets are situated, will be charged equivalent to the outstanding amount of the bonds.

Coupon Rates on Offer – As the issue is rated ‘AA’, its coupon rates are higher by 20 basis points or 0.20% as compared to the IREDA issue and IIFCL issue which are also getting opened from the coming Monday. Ennore Port is offering 9% per annum for its 15-year and 20-year options and 8.61% per annum for the 10-year option to the retail investors investing less than or equal to Rs. 10 lakh.

As always, these rates would be lower by 25 basis points (or 0.25%) for the high net worth individuals (HNIs) and non-retail investors i.e. institutional investors as well as corporate investors.

Minimum & Maximum Investment – Investors are required to put in a minimum investment of Rs. 5,000 in this issue i.e. at least 5 bonds of Rs. 1,000 face value each. Though there is no upper limit for the investors to invest in this issue, an investor investing more than Rs. 10 lakhs will be categorized as an HNI and will get a lower rate of interest.

NRI Investment – Like the IREDA issue, Non-Resident Indians (NRIs) and Qualified Foreign Investors (QFIs) are not eligible to invest in this issue as well.

Investor Categories & Allocation Ratio – As always, the investors have been classified in the following four categories and each category will have certain percentage of the issue size reserved during the allocation process:

Category I – Qualified Institutional Bidders (QIBs) – 10% of the issue is reserved i.e. Rs. 50 crore

Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved i.e. Rs. 100 crore

Category III – High Net Worth Individuals including HUFs & NRIs – 30% of the issue is reserved i.e. Rs. 150 crore

Category IV – Resident Indian Individuals including HUFs & NRIs – 40% of the issue is reserved i.e. Rs. 200 crore

Allotment on First Come First Served Basis – Subject to the allocation ratio, allotment will be made on a first come first serve (FCFS) basis in each of the investor categories, based on the date of upload of each application into the electronic system of the stock exchanges.

Listing – Ennore Port has decided to get these bonds listed only on the Bombay Stock Exchange (BSE) and has successfully got the necessary in-principle listing approval for the same. The bonds will get allotted and listed within 12 working days from the closing date of the issue.

Demat/Physical Option – Investors have the choice to apply for these bonds either in physical form or in demat form, whichever they like.

No Lock-In Period – These tax-free bonds will be freely tradable and do not carry any lock-in period. So, an investor may sell them at the market price whenever he/she wants after these bonds get listed on the BSE.

Interest on Application Money & Refund – Ennore Port will pay interest to the successful allottees on their application money at the applicable coupon rates, from the date of realization of application money up to one day prior to the deemed date of allotment. Unsuccessful allottees will get interest @ 5% per annum on their refund money.

Interest Payment Date – Ennore Port has not fixed the date on which it will be paying its annual dividend and has decided to make its first interest payment exactly one year after the deemed date of allotment. As the deemed date of allotment will be fixed just before the listing date, I will update this post as and when it gets announced.

Profile and Financials of Ennore Port

Ennore Port is a public sector enterprise in which the Ministry of Shipping, GoI holds 66.67% stake and the rest 33.33% stake is held by the Board of Trustees, Chennai Port Trust.

The company is the developer and operator of Ennore Port, which was originally conceived as a satellite port to Chennai Port, primarily to handle thermal coal to meet the requirement of Tamil Nadu Electricity Board (TNEB) and thereafter the scope of the port was expanded taking into account subsequent developments plans of the Tamil Nadu Government to set up liquefied natural gas (LNG), petrochem and naphtha cracker power projects.

Ennore Port functions on the “Landlord Port Model” basis whereby the port constitutes a landlord, which manages the basic port assets by leasing land and basic infrastructure to port operators. Ennore Port carries operating functions such as planning, safety, pilotage, mooring, navigation and overall coordination.

It also provides the basic infrastructure facilities like construction of breakwaters, deepening and maintenance of port channels, dredged basin/channel, road and rail infrastructure for connectivity to hinterland, aids to navigation, fire fighting facilities, utilities, water and power supply and manage the resources apart from regulatory functions and overall port planning & development.

The company was conferred with Mini Ratna Category I status on June 30, 2009 by the government based on its consistent profitability over the previous three years.

During the financial year ended March 31, 2013, Ennore Port reported operating revenue of 320.21 crore and net profit of Rs. 173.37 crore as against operating revenues of Rs. 248.64 crore and net profit of Rs. 96.72 crore during the financial year ended March 31, 2012. Its relative performance during six months ended September 30, 2013 has also been relatively encouraging.

After analysing the financials and credit rating of Ennore Port, I would personally prefer investing my money in the IREDA issue as the differential of 0.20% per annum is just Rs. 200 on an investment of Rs. 1,00,000 and I would like to keep my investment safe rather than running after higher returns.

Application Form of Ennore Port Tax Free Bonds

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in Ennore Port tax-free bonds, you can contact me at +919811797407

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]

The last leg of the current financial year’s tax-free bond issues is all set to begin early next week with IREDA and Ennore Port issues. While IREDA is next in line to issue its tax-free bonds from Monday i.e. 17th of February, Ennore Port issue is also scheduled to open the very next day i.e. Tuesday.

Though the IREDA issue is scheduled to officially close on March 10th, the company has the right to either preclose the issue or extend it depending on the investors’ response.

Before we check out other regular features of the IREDA issue, let us first try to know more about the company and its financials, as only a very few people have heard about this company in the past.

Profile of IREDA

Indian Renewable Energy Development Agency Limited (IREDA) is a wholly-owned government of India (GoI) enterprise and operates under the administrative control of the Ministry of New & Renewable Energy (MNRE). IREDA finances renewable energy & energy efficiency projects and operates a revolving fund for promotion, development and commercialization of new and renewable sources of energy.

The sectors financed by IREDA can be broadly classified under – wind energy, hydro energy, bio energy, solar energy, energy efficiency and conservation, and emerging technologies.

Loans Sanctioned by IREDA (Rs. in crores)

Loans Disbursed by IREDA (Rs. in crores)

Financials of IREDA

During the financial year ended March 31, 2013, IREDA reported profit after tax (PAT) of Rs. 202.65 crore on total revenues of Rs. 729.56 crore as against PAT of Rs. 173.13 crore and revenues of Rs. 534.82 crore during the financial year ended March 31, 2012. Its relative performance during six months ended September 30, 2013 seems reasonably satisfactory with a PAT of Rs. 119.87 crore and revenues of Rs. 444.10 crore.

The company has also been able to improve on its interest rate spread and non-performing assets (NPAs) in the past one year or so.

Now, let us quickly check out the main features of this issue:

Size of the Issue – While IREDA has set the base size of the issue at Rs. 500 crore, the total issue size stands at Rs. 1,000 crore, including the green shoe option of Rs. 500 crore.

Rating of the Issue – Credit rating agencies CARE and Brickwork Ratings (BWR) have assigned ‘AAA’ rating to the issue, which is again the highest rating by any of these rating agencies, indicating lowest credit risk and thus highest safety for the investors’ investments.

Interest Rates on Offer – Due to a jump in the 15-year and 20-year G-Sec yields after the RBI hiked Repo Rate in its monetary policy last month, IREDA issue carries higher rates for these respective tenors at 8.80% per annum. At 8.80%, IREDA’s 15-year option interest rate stands higher than 8.75% NHAI issue was offering and 8.65% IRFC issue carried for 15 years.

NRI Investment – Non-Resident Indians (NRIs) and Qualified Foreign Investors (QFIs) are not eligible to invest in this issue.

Investor Categories & Allocation Ratio – The investors have been classified in the following four categories and as always each category will have certain percentage of the issue reserved during the allocation process:

Category I – Qualified Institutional Bidders (QIBs) – 10% of the issue i.e. Rs. 100 crore is reserved

Category II – Non-Institutional Investors (NIIs) – 20% of the issue i.e. Rs. 200 crore is reserved

Category III – High Net Worth Individuals including HUFs – 30% of the issue i.e. Rs. 300 crore is reserved

Category IV – Resident Indian Individuals including HUFs – 40% of the issue i.e. Rs. 400 crore is reserved

Allotment on First Come First Served Basis – Subject to the allocation ratio, allotment will be made on a first come first serve (FCFS) basis in each of the investor categories, based on the date of upload of each application into the electronic system of the stock exchanges.

Listing, Lock-in Period, Premature Redemption – The company has decided to get its bonds listed on the Bombay Stock Exchange (BSE) as well as on the National Stock Exchange (NSE). Like with the past issues, these bonds will also get allotted and listed within 12 working days from the closing date of the issue.

There is no lock-in period with these bonds, but at the same time, you cannot redeem these bonds back to the company before their maturity period gets over. In order to encash your investment before maturity, you’ll have to compulsorily sell these bonds on the stock exchange(s) where they will get listed for trading.

Demat/Physical Option – Though it is mandatory to have a demat account to sell/trade these bonds, you can subscribe to them in physical/certificate form as well and keep them till maturity. Interest will get credited to your linked bank account through ECS.

Interest on Application Money & Refund – IREDA will pay interest to the successful allottees on their application money, from the date of realization of application money up to one day prior to the deemed date of allotment, at the applicable coupon rates. Unsuccessful allottees will get interest @ 5% per annum on their refund money.

Face Value of the bonds & Minimum Investment – The company has decided to keep the face value of these bonds as Rs. 1,000 and the investors will be required to apply for at least five bonds to participate in the offer.

Interest Payment Date – Like many issues in the past, IREDA has not fixed its interest payment date as yet and the first due interest will be paid exactly after one year from the deemed date of allotment.

As far as the safety of the investors’ investments is concerned, I would like to mention it here that MNRE (GoI) has issued a “Letter of Comfort” to IREDA which states, inter alia, that the Ministry has been infusing equity capital into the company to support its business plans and will continue to support it in future as well whenever required. Besides, the Ministry will ensure that IREDA meets its payment obligations on these tax free bonds in a timely manner.

The issue looks reasonably good to me from the long-term investment point of view. The only thing which is required to earn capital gains from these tax-free bonds is a healthy fall in the G-Sec yields.

Application Form of IREDA Tax Free Bonds

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in IREDA tax-free bonds, you can contact me at +919811797407

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]

It has been a very long time since Deepak suggested Manshu and me to cover a post having post-listing details of tax free bonds issued during last three financial years. Like a large number of investors, he too has been struggling to keep himself updated with different interest payment dates, scrip codes, scrip ids, ISIN numbers of these bonds, which of these bonds carry step-down feature and many such things.

This is what Deepak had to say:

Deepak October 28, 2013 at 4:28 pm

Hi Shiv, (I have given the same suggestion to Manshu. Please speak to him as well)

There are a number of tax free bonds in the market every year, for the past 3 years.
The interest rates are different for each bond in each year!
What makes it more complicated is that the interest rates are different for the same bond if you have got a direct allotment or bought it from the stock market.
Each one comes with a different date of interest payment.

With all this, it has become really difficult to track the interest payment. I also find it difficult to link the bonds to their Scrip ID and Code because of the long list of bonds in my statement.
I also don’t know in which month will I receive the interest of the bonds that I purchased last year.

Would it be possible for you to have a table with the following details as one of your articles?

Company
Year of Issue
ISIN
Scrip Id
Scrip Code
Rate of Interest (Direct Allotment)
Rate of Interest (If purchased later)
Due date of interest
And anything else that you find appropriate…

I’m certain it would benefit a lot of people.

Regards,
Deepak

As both of us have been keeping very busy for the past many weeks, we were not getting enough time to cover this post and work on Deepak’s requirements. As I just got time to cover this post, here is the table which should help most of us to keep ourselves updated with the deemed date of allotment of these tax-free bonds, their interest payment dates, BSE codes, NSE codes, maturity dates and their respective coupon rates applicable to the retail investors as well as other investors.

Tax-Free Bonds issued during Financial Year 2013-14

(Note: Table updated on March 31, 2014)

Deepak wanted us to cover these details for all the tax free bonds issued during the past three years. But, to begin with, I have covered these details only for the current financial year i.e. FY 2013-14. I want to experiment this post with the current financial year and will cover the details of previous years’ tax-free bonds separately in two other posts. I’ll also keep updating this table as and when the remaining companies launch their respective issues and get these bonds listed on the stock exchanges.

I would also request you to share your views regarding this post and suggest some more ideas for the other two posts so that I can cover more such details about these listed bonds.

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]

As the NHAI issue opens today, many investors have not been able to decide which issue they should go for – NHAI 8.75%, 8.52% or IRFC 8.65%, 8.48%. This comparison also becomes significant as no other company has even filed the draft prospectus for its issue. Before I do the comparative analysis, let’s check once again why these tax free bonds have become so popular with the investors.

Investors’ response to the tax-free bonds this financial year has been quite better as compared to the last financial year. The reasons are simple:

Higher Rate of Interest – Last year, these tax-free bonds were carrying lower rate of interest rates, broadly in the range of 7-8%. This year, their interest rates have been higher by around 1%. At the same time, interest rates on other saving instruments, like bank fixed deposits (FDs), post office schemes, company FDs etc., are more or less stable or just slightly higher.

Thanks to the higher G-Sec rates, it is natural for the investors to opt for 9.01% tax free bonds from the National Housing Bank (NHB) as against 9% fixed deposit interest rates from the State Bank of India (SBI) or from some other banks.

Removal of “Step Down” Clause – Till last year, these bonds carried the “Step Down” clause, as per which the buyer(s) of these bonds from the secondary markets are entitled to a lower rate of interest as compared to the first allottees. This is not applicable with the bonds issued during the current financial year.

This is also the reason why the bonds issued last year attract a very low trading interest, which I think should not be the case with this year’s tax free bonds going forward.

Lower Rate Differential – Differential between the rates offered to the retail investors and the non-retail investors got fixed at 0.25% per annum this year, which stood at 0.50% till last year. Non-retail investors considered it to be on a higher side and their participation was quite limited last year. This year, non-retail investors’ participation has been considerably better, especially with NHPC, NTPC and NHB.

Losses in Gilt/Income Funds – Bloodbath in the debt markets or a steep fall in the NAVs of debt mutual funds, due to some incorrect policy measures by the government and the RBI and also QE3 tapering announcement by the US Fed, also led to a shift in the investors’ interest towards these tax free bonds.

Investors of these tax free bonds know that they are going to get at least some fixed interest income every year in their bank accounts, even if there is no capital appreciation or even if the interest rates move higher from the current levels, resulting in a notional capital loss.

So, with very few options left available for the current financial year, the investors at present are asking themselves:

NHAI 8.75% or 8.52% vs. IRFC 8.65% or 8.48% – which issue should I invest in?

In terms of interest rates, it is very much clear that NHAI is offering higher rate of interest than IRFC, so it is relatively better. But, is it that simple? Certainly not, at least not for a common investor. How are these two companies different and which company is fundamentally better? Let us try to do some analysis.

Though not strictly comparable, I’ve tried to do a comparison between IRFC and NHAI on certain parameters. While IRFC is the wholly-owned financial arm of Indian Railways, NHAI is an autonomous body of the Government of India. Both these companies are strategically important for the Government of India (GoI).

IRFC got constituted in December 1986 for the purpose of raising the necessary resources for meeting the developmental needs of the Indian Railways. NHAI got operationalised in February 1995 for the development, maintenance and management of India’s national highways.

While IRFC has been classified as the Infrastructure Finance Company (IFC) by the RBI, NHAI is the nodal agency for the development and maintenance of national highways across the country, which makes it an infrastructure developer itself.

Financial Position of IRFC and NHAI

IRFC has a net worth of Rs. 5,794.28 crore as on March 30, 2013, whereas the same stands at Rs. 81,053.11 crore for the NHAI. As IRFC lends almost all its borrowings to the Indian Railways for financing rolling stocks, it has zero non-performing assets (NPAs).

IRFC, on an annual basis, enters into a standard lease agreement with the MoR and earns an assured net interest margins from the MoR which has remained 0.50-0.51% in the last five fiscal years. MoR also bears the interest rate risk as well as the exchange rate risk. As it also gets regular capital infusion by the government of India, it got Rs. 600 crore during FY 2013.

Also, here are certain financial numbers of IRFC over the past few years:

As NHAI has been running into operational losses for the last few years, it is not practical to analyse its profitability position and make a comparison with that of IRFC. But, NHAI is a bigger organisation and has a total capital employed at Rs. 1,13,331 crore and capital work in progress (CWIP) at Rs. 1,06,440 crore as on March 31, 2013.

NHAI has been mandated by the GoI to implement National Highway Development Project (NHDP) with an estimated investment of about Rs. 2.48 lakh crore, spread over seven phases. NHDP envisages improvement of approximately 54,500 kms of national highway network.

As it is very difficult to conclude which organisation is better between the two in terms of overall financial performance and operational efficiency, personally I think NHAI issue is a better one as it offers a higher rate of interest, the size of the organisation can be considered as too big to fail and its strategic importance in India’s road & highways development is too significant to ignore.

Which one do you think is better between the two and how long do you think the NHAI issue will last? Please share your views.