SREI Infrastructure Finance Limited NCD Review

by Shiv Kukreja on September 23, 2012

in Featured,Fixed Deposits

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

SREI Infrastructure Finance Limited is the latest company to join the bandwagon of non-convertible debentures (NCDs) and without making much noise about it, the issue has already been launched by the company on September 20th. Though SREI Infra issued tax-saving infrastructure bonds last financial year, this is the first public issue of NCDs by the company.

This is a relatively small size issue of Rs. 150 crore only, including the option to retain Rs. 75 crore in case of oversubscription. The company plans to use the proceeds for various financing activities, to repay its existing loans, for capital expenditures and other working capital requirements.

About SREI Infrastructure Finance Limited

SREI Infrastructure Finance Limited is primarily engaged in providing infrastructure financing for the development of power, roads, urban infrastructure, telecom, SEZs and industrial parks etc. It is also engaged in equipment leasing, rentals & auctioning, project financing, project development, advisory and fund management. The company has also been granted the status of Infrastructure Finance Company (IFC) by the RBI, which makes it one among very few companies which have been given this status.

Financials of the company

SREI reported total income of Rs. 2,446 crore for the year ended March 31, 2012, as against Rs. 1,638 crore it generated for the year ended March 31, 2011, an increase of 49%. But, the company reported a decline of 38% in its net profit, which stood at Rs. 111 crore in FY12 as compared to Rs. 179 crore in FY11.

Gross NPAs and Net NPAs of the company stood at 1.25% and 1.12% respectively as on March 31, 2012. The company had zero NPAs till March 31, 2011. Debt Equity Ratio of the company stands at 1.54 times before this issue and will result in 1.60 times after this issue.

Here is the link to check the latest audited financial results of the company ending March 31, 2012 –

About the NCD Issue

These NCDs would be secured in nature and carry a maturity period of 7 years under all its options. These NCDs also offer a “Put Option” to the individual investors, which gives them the authority to redeem these bonds after 60 months from the date of allotment.

40% of the issue is reserved for the individual category portion, 40% of the issue is for the non-institutional investors and the remaining 20% of the issue is for the institutional investors. In this issue, there is no differentiation between the retail individual investors, including the HUFs, investing less than Rs. 5 lakhs and high-networth individuals (HNIs), investing more than Rs. 5 lakhs. The allotment will be made on a first-come-first-serve basis.

Category I – institutional investors and Category II – non-institutional investors are not allowed to subscribe for Series I – monthly interest option and Series II – quarterly interest option, whereas individual category investors can subscribe to any series of these NCDs.

Series I II III IV
Tenor 7 Years 7 Years 7 Years 7 Years
Frequency of Interest Monthly Quarterly Annual Cumulative
Category of Investors Individual Individual All All
Minimum Investment Rs. 1,00,000 Rs. 1,00,000 Rs. 10,000 Rs. 10,000
Coupon 9.84% 9.92% 10.30% N.A.
Effective Yield 10.30% 10.30% 10.30% 10.41%
Redemption Amount Rs. 1,000 Rs. 1,000 Rs. 1,000 Rs. 2,000
Put Option Yes; After 60M Yes; After 60M Yes; After 60M Yes; After 60M

There are many features in this issue which make it quite unattractive for the investors. Firstly, the interest rate is quite low as compared to the other issues. The company is offering these interest rates under four different series – payable monthly, payable quarterly, payable annually and cumulative annually, offering 9.84%, 9.92%, 10.30% and 10.41% per annum respectively. There is very little additional incentive for the retail investors in this issue.

These NCDs have been packaged in such a manner that the effective yield to the individual investors would be either 10.30% p.a. or 10.41% p.a. at the most. Under the cumulative interest option, the individual investors will get Rs. 2,000 and the institutional and non-institutional investors will get Rs. 1,980 at the time of maturity against Rs. 1,000 invested. The company will not deduct any TDS on the NCDs taken in the demat form.

Secondly, the company has decided to keep the minimum investment requirement of Rs. 1 lakh (or 100 NCDs of face value Rs. 1,000), if an individual investor opts for the monthly or quarterly interest option. I think this amount is too high to be the minimum investment from the small retail investors’ point of view.

Moreover, these NCDs are going to get listed only on the BSE and as the issue size is relatively small, this might create a liquidity problem in future.

It is not mandatory to have demat account to invest in this issue as the investors have the option to apply these bonds in physical form also. NRIs and foreign nationals among others are not eligible to invest in this issue.

The issue has been rated ‘CARE AA’ by CARE and ‘BWR AA’ by Brickwork Ratings and closes on October 25, 2012.

Like Muthoot Finance NCDs, I don’t find any single reason for me to invest in this issue as well. I think SREI Infra wants to test the water of the NCDs market with this issue, keeping the rate of interest below 10%. It is not going to attract great interest from either the institutional investors or the retail individual investors and should ideally remain undersubscribed even with the issue size of Rs. 75 crore only.

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