IIFCL Tax Free Bonds

These bonds are in the nature of secured redeemable non-convertible bonds with a face value of Rs 1000. The bonds are available for tenures of 10 years (Series 1), 15 years (Series 2) and 20 years (Series 3). The coupon rates being offered by the company for the three series are 7.19%, 7.36% and 7.4% respectively. (For details, see Issue Information table)

About The Company
IIFCL is one of the key financial intermediaries in India and lends financial assistance to long-term infrastructure projects. It provides loans to various sectors, primarily roads & bridges, power, transportation and other physical infrastructure in urban areas. In addition to this, IIFCL is also engaged in refinancing and take-out financing to eligible institutes. The company’s wholly-owned subsidiary, IIFC (UK), funds Indian companies implementing infrastructure projects in India that required imports.

As at the end of September 30, 2012, the cumulative loan sanctioned by IIFCL on a standalone basis is Rs 49603 crore in 282 projects and the total disbursements stand at Rs 23702 crore. The major exposure of the company is in power, roads and urban infrastructure. What is notable is its low Net NPAs, which stand at 0.05% at the end of September 2012.

If we look at the financial performance of IIFCL, for the three fiscal years ending FY12, its profit after tax has witnessed a CAGR of almost 80%. Even for the first half of this fiscal (FY13), the company has maintained its performance and its PAT is almost equal to what has been achieved in the last fiscal (FY12).

The healthy financials help the company maintain a strong rating. Its long-term unsecured taxable bonds enjoy CARE AAA (SO) rating and the long-term infrastructure bonds have a CARE AAA rating. In addition to this, IIFCL’s government-guaranteed bonds have AAA (SO) rating with a stable outlook from ICRA and BWR AAA (SO) rating with a stable outlook from Brickworks.

Conclusion
With government backing, its sound financials along with huge infrastructure spending planned in the country, we believe there is no risk attached to IIFC’s ability to repay. However, one needs to check the post tax yield provided by these bonds and compare it with other similar opportunities. For example, ICICI Bank is offering an interest rate of 8.5% for its 10-year fixed deposits, for which the actual post tax yield for an individual in the higher tax bracket of 30% comes out to be 5.95% (8.5% less 30% of 8.5%). In comparison, the coupon rate provided by IIFCL for 10 years, which is tax free, is 7.19% (post tax yield). A similar comparison can be done for other tax brackets and tenures before you zero in on your investments.