Dredging Corporation of India Issues Tax Free Bonds

Introduction

Recently, there has been a flood of tax-free bond issues in the market. There are already around 6 companies that are in the markets with tax-free bond issues currently open. Of the 6, we had picked HUDCO bonds as our recommendation of choice and had advised ignoring the other issue. Now, Dredging Corporation of India (DCI) has tapped the market to raise funds upto Rs 500 crore (threshold limit available to the company in FY13). Let’s take a look at the details of this issue and how it looks in comparison to the other recent bond issues.

About DCI

DCI is into the business of dredging since 1976, ensuring that there is a continuous availability of the desired depth in shipping channels. The company majorly operates in Indian seaports and sometimes at foreign seaports, including ports in Taiwan and Dubai. On the financial front, for the December quarter of 2012, the company’s revenues increased by 123% to Rs 172 crore while its Net Profit stands at Rs 3.59 crore against a loss of Rs 28 crore in the similar period last year.

However, investors should not get carried away with the performance, as the company has posted volatile numbers in the past. Despite a decent topline, it is not able to post good bottomline growth. This is the main reason why the stock has not performed in the past one year. In last one year, DCI’s stock has declined by 19% against the Sensex, which has moved higher by 11%.

The company has come out with only one option for investors, which is for a tenure of 10 years, unlike its other issues where the also offered a 15-year tenure.  The coupon rate offered for retail individuals is 7.47% and the interest on the same will be paid on an annual basis.

The minimum application size for the issue is Rs 5000 (i.e. 5 bonds of FV Rs 1000 each), after which, applications can be made in multiples of Rs 1000 each (one bond). The issue opened on March 7, 2013 and will close on March 15, 2013. The bonds would be listed on the Bombay Stock Exchange (BSE).

Conclusion

We believe that DCI has tapped the market very late as compared to the other tax free bond issues, which opened at the end of February 2013 and are going to close on March 15, 2013. Therefore, the response to this issue may be fairly lukewarm. Further, it also doesn't have the option to invest for 15 years, which most of the other issues had.

Only those who wish to invest for a longer horizon should opt for such issues. Also bear in mind that investors falling in higher tax brackets get the most benefit by investing in such issues.

Overall, we believe that investors can give the DCI tax-free bonds issue a miss. We continue to hold our recommendation for HUDCO’s tax-free bonds as they offer higher coupon rates as compared to the other offers.