Shriram City Union Finance NCD Coupon 11.75%

Introduction
After IIFL, it’s time for Shriram City Union Finance (SCUF) to tap the market with its non-convertible debentures (NCD) and raise funds aggregating to Rs 500 crore. The company plans to raise funds with an option to retain the over-subscription of an additional Rs 250 crore. After the overwhelming response from the investors’ community to the IIFL issue, this issue is also expected to do well. The funds so raised will be used in for operational purposes as well as lending, investments, working capital requirements, etc.

About The Company
SCUF is a deposit-accepting NBFC registered with the Reserve bank of India (RBI). The company caters to small enterprises and provides retail loans that include personal loans, loans against gold, product finance and auto loans. As on June 30, 2012, of the total loans, around 39 per cent comprised loans against gold while 31 per cent of the total loans were provided for small enterprises. Up to 13 and 11 per cent were given as two-wheelers and auto loans and the remaining allotted to personal finance and consumer durables. This indicates that the company has a well-diversified loan book, which helps to reduce the risk of non-performing loans.

SCUF also has a declining trend in its NPAs, which is commendable. The net NPAs of the company as on June 30, 2012 stood at 0.34 per cent, which was lower by 4 basis points on a sequential basis and 10 basis points on a YoY basis. For the June quarter of 2012, the net interest income (NII) of the company increased by 60 per cent to Rs 232 crore while the net profit grew by 29 per cent to Rs 103 crore on a YoY basis.

Issue Information
SCUF is offering four options for investment of which the first two options are with annual interest payment and the latter two give a cumulative interest rate option to the investors. Further, the first and the third options are for tenure of 36 months, carrying a coupon rate of 11.50 per cent while the second and fourth are with a horizon of 60 months with a coupon rate of 11.75 per cent. The face value of the debentures is Rs 1,000 and the minimum application is for Rs 10,000 i.e. 10 NCDs of face value of Rs 1,000. Thereafter the application can be made in multiples of Rs 1,000 or 1 NCD. The NCD would be listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The issue opens on September 12, 2012 and closes on September 26, 2012. The company has given special incentives in terms of higher coupon rate for retail individuals.

Difference In IIFL And SCUF NCD Offering
The IIFL issue had three options with an investment horizon of six years, offering a coupon rate of 12.75 per cent. On the other hand, the SCUF NCD is available with four options available for three and five years. Not only the company has a lesser investment horizon but also offers a lower coupon rate of 11.75 per cent (maximum). Apart from the horizon and coupon rate, one should also look at other factors such as the fact that the SCUF NCDs are secured in nature while those of IIFL were unsecured. Further, IIFL is a subsidiary of India Infoline, a leading player in India’s financial service segment, which is listed on the bourses while SCUF itself is listed on the exchange and is also a part of the Shriram Group which is a financial service conglomerate. One should note that a listed entity is more reliable and is more transparent as it regularly gives updates to the investors and is also consistently under the eyes of the regulators.

Conclusion
Though the interest rate is lesser than that what IIFL was offering, we believe investors would rush to get this NCD and hence you should not wait for the last day to subscribe. Note also that the volumes on the exchanges are quite low and hence investors wishing to subscribe should redeem at the time of maturity. Further, the interest received on the same would depend on individual tax slabs subject to the normal tax rate.

We at Dalal Street Investment Journal (DSIJ) believe that the third and fourth options would be good for those who do not have any liquidity issues while those wishing to get regular interest income may opt for the first or the second option. One could invest either in a three or five-year horizon depending upon individuals needs. One can diversify the risk going ahead as we believe that companies like Muthoot Finance and Religare Finvest are very soon going to tap the market with more or less such kinds of issues and hence one should invest in SCUF NCD with a limited exposure.