PFC Tax Free Bonds
DSIJ Intelligence / 14 Dec 2012
PFC, a state-run financial institution dedicated to power sector financing, is coming out with tax-free bonds and plans to raise Rs 1000 crore. The company has received authorisation from CBDT to raise bonds upto Rs 5000 crore in this fiscal year (FY13). Of this target, PFC has already raised Rs 410 crore and plans to raise Rs 1000 crore in this issue with an option of retaining the oversubscription up to Rs 4590 crore. The issue opens for subscription today (Dec 14, 2012) and closes on Dec 21. The bonds would be raised through the non-convertible debenture (NCD) route.
So, should you subscribe to this issue? While making your decision, in addition to the coupon rate that is being offered by such bonds, one should look at the company and its ability to repay your principal and interest.
About the company
PFC is the largest power financer in India and its assets have seen a CAGR of 12 per cent for the four years ending FY12. If we look at the company’s current performance, we find that it has improving on all the financial parameters. Its loan book for the 6 months ending Sept 2012 has increased by 8%. What is a positive is that such growth has not come at the cost of asset quality, and this is reflected in the improvement in Net NPAs, which currently stands at 0.86% as against 0.93% at the end of FY12. We also find the Net Interest Margin (NIM) improving – this stands at 4.28%, an increase of 39 basis points in the last 6 months. Looking at the company’s past and recent performance, we believe that it will continue to perform well going ahead and has a strong footing.
The strong financial numbers are reflected in the [ICRA] AAA rating awarded to the issue by ICRA and that of CRISIL AAA/Stable awarded by CRISIL. Instruments with these ratings are considered to have the highest degree of safety regarding the timely servicing of financial obligations. Such instruments also carry the lowest credit risk.
Should you subscribe?
There is no doubt about PFC’s credibility, but what one needs to look at is the yield on investment the company is providing. As you may already know, any income from NCDs is to be added to the total income for the year and taxed at the normal rate. As PFC is issuing tax free bonds, these will be more beneficial to investors falling in the higher tax bracket. (Refer the table for yield at various tax brackets). Moreover, we believe that interest rates are bound to come down going forward and therefore, it makes sense to lock your yield at these levels. Thus, we recommend that a part of your investment portfolio should find its place in this issue.
| Issue Information | ||
|---|---|---|
| Particulars | Option I | Option II |
| Face Value | Rs 1,000 | |
| Minimum Application | Rs 5000 (i.e. 5 Bonds) | |
| Horizon | 10 Years | 15 Years |
| Coupon for Retail Individual (% p.a.) | 7.69 | 7.86 |
| Interest Payment | Annual | Annual |
| Issue Opens On | 14-Dec-12 | |
| Issue Closes On | 21-Dec-12 | |
| Listed On | BSE and NSE | |
| Tax Rate (%) | Effective Yield (Post Tax) | |
| 10.3 | 8.57 | 8.76 |
| 20.6 | 9.69 | 9.90 |
| 30.9 | 11.13 | 11.37 |
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