Religare Finvest NCD – Should you subscribe?

Religare Finvest has offered investors two options for its Secured Redeemable Non-Convertible Debentures (NCDs), with a minimum investment amount of Rs 10000. (10 NCDs of face value Rs 1000). For Retail Investors, Option I has a coupon rate of 12.50%, with a time horizon of 60 months. Option II is for a shorter tenure of 36 months, with a coupon rate of 12.25% In both cases, the frequency of interest payment will be annual. The company is planning to raise up to Rs 400 cr through this issue, with an option to retain oversubscription of an additional Rs 400 cr, taking the total size of the issue to Rs 800 cr.

As per the prospectus, 20 per cent of the overall issue size is reserved for institutional investors, 30 per cent for non-institutional investors and the remaining 50 per cent for retail investors, on first-come-first-served basis. The issue opens on September 9, 2011, and closes on September 26, 2011. The NCDs will be listed on the Bombay Stock Exchange. The funds raised by the company will be used for its various financing activities, repayment of existing loans, capital expenditure as well as its working capital requirement.

Religare Finvest is a Non-deposit accepting NBFC, which focuses on SME financing and financing of the retail capital market. It is a wholly-owned subsidiary of Religare Enterprise, and is also a diversified financial company. The following table shows us the loan book of Religare Finvest as on June 30, 2011:

From the table, we can see that major portion of the loan is issued in SME Financing, which consists of loan against property and commercial assets. In loan against property, there is huge competition from banks. Therefore, interest spread will be low in this segment, which will affect the company’s bottomline. Another major portion of the company’s loan book comprises loan against capital market security, which could be considered risky.

The NCDs are rated ‘AA- (stable)’ and ‘AA-‘ by ICRA and CARE respectively. Recently, there have been many NCDs tapping the market and offering somewhat similar coupon rates and tenures. While the company is offering the highest coupon rate (12.50 per cent) amongst all, there are concerns related to its financial statements. Despite operating income increasing by 132 per cent to Rs 1073 crore in FY11, net profits increased only marginally by 12 per cent to 114 crore.  The reason for this is that interest expense increased to Rs 645 crore in FY11, from 177 crore in FY10 (up 265 per cent), affecting the bottomline.

The following table compares Religare Finvest with other recent NCD-issued players in FY11:

From the table, we can see that Religare Finvest has a very low net profit margin of 10.69 per cent, when compared with other NBFCs which issued NCDs last month. The company’s capital adequacy ratio is low, but its debt-to-equity ratio is higher as compared to that of its peers. On the net NPAs, the company has managed to keep it at 0.02 per cent, which is better. Also, there is no Deep Discount Bond option which was available in India Infoline Investment Services and Manappuram Finance, which would have given better tax-adjusted returns. There is nothing exciting about this offer, and one can afford to ignore it.

Meanwhile, the following table gives the details of recent-listed debentures:

From the above table, we can see that the recent listed debentures are trading at thin volumes, and are available at a huge discounted price. So, it would be advisable to those who wish to park their money in this NCD to buy from the exchange post-listing, as the same would probably be available at a discount, improving your yield to maturity.