HUDCO To Issue Tax-Free Bonds: Should You Buy?

It is said that if one investment is not yielding well, the best way to create wealth is to maximise returns by looking for better opportunities. This time, investors have many fresh opportunities to invest in tax-free bonds as the government has recently allowed the 13 state-run entities to raise around Rs 48000 crore through this route.

While a few weeks ago, REC came out with an issue, now Housing and Urban Development Corporation (HUDCO) will hit the markets on September 17 to raise upto Rs 4810 crore through a public issue of tax-free bonds. The funds raised would be utilised for lending to low-cost housing and urban infrastructure projects. We feel that the government’s fundraising would pour in some liquidity for the players to start a few urban infra projects.

The Finance Ministry has allowed HUDCO to raise Rs 5000 crore through bonds during FY14, of which Rs 190.8 crore has been raised last month through private placement to institutional investors. As regards this particular issue, the management has stated that, "The minimum size of the bond issue is Rs 750 crore, but we expect to raise the entire Rs 4810 crore as our coupon rate is very attractive”.

For retail investors applying for bonds worth upto Rs 10 lakh, the coupon rate shall be 8.39% per annum for 10 years, 8.76% for 15 years and 8.74% for 20 years. However, the effective yield on investments would vary according to the tax slab. For example, if the tax slab is 10% then the effective yield would be 9.35%, 9.76% and 9.74% for 10-year, 15-year and 20-year periods respectively. Similarly, the yield for the 20% tax slab would be 10.56%, 11.03% and 11% respectively. The biggest beneficiaries would be people in the 30% tax slab, as the effective yield would be 12.14 %, 12.67% and 12.64% respectively.

While this is the story for retail, the coupon rates for HNIs and QIBs are different. The bonds bear a coupon rate of 8.14% per annum for 10 years, 8.51% for 15 years and 8.49% for 20 years for qualified institutional buyers (QIBs), corporates and high net worth individuals (HNIs).

While investors may get confused with a flood of bond offers, we feel that HUDCO is a better option as the coupon rates for REC are lower (8.01% for 10 years, 8.46% for 15 years and 8.37% for 20 years). We recommend that you go in for investment in the bonds issued by HUDCO.