SREI Infrastructure Finance NCD: Avoid
DSIJ Intelligence / 21 Sep 2012
It’s time for SREI Infrastructure Finance to tap the market to raise funds of approximately Rs 150 crore by issuing secured, redeemable and non-convertible debentures (NCD). The company plans to raise NCDs worth Rs 75 crore with an option to retain the oversubscription of Rs 75 crore. The issue has already opened on September 20 and will close on October 25. The funds raised through the issue will be used for financing various activities such as investment and lending, repay existing loans and for working capital requirements, etc.
Earlier, companies like IIFL, Shriram City Union, Muthoot Finance and Religare Finvest have tapped the market to raise funds aggregating around Rs 2,000 crore. While the IIFL NCD is already closed, the other NCD would also probably close very soon in the wake of a good response from the investors. One should note that these NCDs are less risky than equity and also provide an additional advantage compared to the traditional form of fixed deposits with a bank. This is one of the reasons why investors have been displaying such keen interest in NCDs. The following table shows the list of companies and their subscription details.
| Companies | Subscription (Times) |
|---|---|
| India Infoline Finance | 2.36 |
| Shriram City Union | 1.22 |
| Muthoot Finance | 0.10 |
| Religare Finvest | 0.64 |
| Source : BSE |
About SREI Infrastructure Finance
SREI Infrastructure Finance has been classified as an infrastructure finance company (NBFC-ND-SI) with effect from March 31, 2011. The company provides financial products and services for customers engaged in infrastructure development and construction, focusing majorly on power, road, telecom and various other sectors in India. On a consolidated basis, the company’s total income increased by 49 per cent to Rs 2,446 crore during FY12 while its net profit after tax stood at Rs 123 crore as against Rs 196 crore in the same period last year. This was on account of some forex losses.
The disbursement by the group increased by 49 per cent to Rs 18,600 crore in FY12. However, despite the same we believe there could be some pressure on the quality of its financing as it provides services to sectors that are prone to high risks. Further, for FY12, the net NPAs of the company increased by 20 basis points to 2 per cent and the net interest margin (NIM) contracted by 20 basis points to 4.4 per cent on a YoY basis, which does not bode well for the company.
Issue Information
The company has given investors four options to choose from for a tenure of seven years. The options are different in terms of their interest payment as the first one has monthly interest payment and the second and third have quarterly and annual payment while the fourth option is cumulative in nature which doubles the money after seven years. The minimum application for the issue is of Rs 1 lakh (100 NCDs with face value of Rs 1,000). Thereafter the application can be made in multiples of Rs 1,000 or one NCD. The NCD is proposed to be listed only on the Bombay Stock Exchange (BSE).
An important thing to note is that the company is coming out with a ‘put’ option in the issue which means that investors have the option to sell the NCD if they wish to pull out their money in case of any individual requirement. However, this can be done only at the end of five years. The following is the issue information table which shows the horizon and the rate of interest available under the various options.
| SREI Infrastructure Finance | ||||
|---|---|---|---|---|
| Options | I | II | III | IV |
| Tenure | 7 Years | |||
| Minimum Application (Rs) | 1,00,000 | |||
| Frequency of Interest Payment | Monthly | Quarterly | Annually | Cumulative |
| Effective Yield (%) Per Annum | 10.3 | 10.3 | 10.3 | 10.41 |
| Redemption Amount on Maturity (Rs / NCD)* | NA | NA | NA | 2,00,000 |
| Put Option | Yes, and is exercisable at the end of 5 years | |||
| Redemption Amount on Exercising Put Option (Rs / NCD)* | NA | NA | NA | 1,63,300 |
| *Assuming minimum amount is invested | ||||
Conclusion
The issue would be allotted on a ‘first come first served’ basis. We at Dalal Street Investment Journal (DSIJ) believe that one could skip the issue on the back of various reasons, primarily because of the lower interest rate offered by the company as compared to the other recent NCDs (approximately in the range of 100 to 200 basis points). Further, fixed deposits with banks for a tenure of five years (same tenure at which the SREI is offering the ‘put’ option) are available in the range of 9 to 10 per cent which seems to be more appropriate and convenient. Even the minimum application of Rs 1 lakh might restrict some investors from considering this issue.
Overall we believe that the company did not perform well in FY12, which is evident from the above stated reasons. The company has exposure to various risk-prone sectors so that its asset quality could be under pressure in the near to medium term. Even on an YTD basis the stock has given negative return of almost 3 per cent against the benchmark Sensex which has appreciated by around 18 per cent. Our advice is to avoid investing in this NCD.
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