DHFL 9.25% Non-Convertible Debentures (NCDs) – August 2016 Tranche II Review

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

In the absence of any fresh supply of tax-free bonds, investors are lapping up non-convertible debentures (NCDs) like never before. In its last issue in the first week of August, DHFL (Dewan Housing Finance Limited) received applications worth Rs. 18,651 crore as against Rs. 4,000 crore worth of NCDs on offer. Nobody, including the management of DHFL, expected such a huge demand which poured in from all categories of investors.

To capitalise on such a big appetite for debt instruments and an abundant liquidity in the system, DHFL is bringing one more issue of its NCDs from the coming Monday i.e. 29th August. The investors will be offered a slightly lower rate of interest between 9.10% to 9.25% for a period of 3 years, 5 years and 7 years.

Issue Closing Date – September 12 is the official date of this issue getting closed. But, if you want to invest in these NCDs, you should not wait for this date as the issue is not likely to remain open for that long. Going by the response DHFL NCDs got in its first issue, I don’t think it should remain open for more than 5 working days.

Issue Size – After getting a bumper response to its previous issue of Rs. 4,000 crore, DHFL is overwhelmed and does not want to miss the opportunity to cash in on this craze for its NCDs. So, the company has decided to launch an even bigger issue of Rs. 10,000 crore this time around. Base size of the issue is Rs. 2,000 crore and there is a green shoe option to retain Rs. 8,000 crore more.

Coupon Rate & Tenor of the Issue – The issue will carry coupon rate of 9.10% p.a. for an investment period of 3 years (36 months), 9.20% p.a. for 5 years (60 months) and 9.25% p.a. for 7 years (84 months). Interest will be paid compulsorily on an annual basis every year. Monthly interest and cumulative interest options are not there this time around.

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Credit Rating & Nature of NCDs – CARE and Brickwork Ratings have rated this issue as ‘AAA’ with a ‘Stable’ outlook. ‘AAA’ rated debt instruments are considered to be the safest from credit default point of view. Moreover, these NCDs are ‘Secured’ in nature and investors with such secured NCDs have the right on certain assets of the issuer in case of any financial trouble for the company.

Objective of the Issue – DHFL plans to use the issue proceeds for its lending and financing activities, to repay interest and principal of its existing borrowings and other general corporate purposes.

Categories of Investors & Allocation Ratio – The investors have been classified in the following four categories and each category will be allocated NCDs as per the percentages fixed for them:

Category I – Qualified Institutional Bidders (QIBs) – 30% of the issue i.e. Rs. 3,000 crore

Category II – Non-Institutional Investors (NIIs) – 10% of the issue i.e. Rs. 1,000 crore

Category III – High Net Worth Individuals (HNIs) including HUFs – 30% of the issue is reserved i.e. Rs. 3,000 crore

Category IV – Resident Indian Individuals including HUFs – 30% of the issue is reserved i.e. Rs. 3,000 crore

Allotment on First-Come-First-Served (FCFS) Basis – Subject to the allocation ratio, allotment will be made on a first-come-first-served basis in each of the investor categories, based on the date of upload of each application into the electronic system of the stock exchanges.

NRIs Not Eligible – Like its previous issue, non-resident Indians (NRIs), foreign nationals and qualified foreign investors (QFIs) among others are not eligible to invest in this issue.

Listing, Premature Withdrawal & Put/Call Option – These NCDs will get listed on both the stock exchanges i.e. Bombay Stock Exchange (BSE) as well as National Stock Exchange (NSE). The listing will take place within 12 working days after the issue gets closed. Moreover, the issue does not carry ‘Call’ option for DHFL or ‘Put’ option for the investors. However, as these NCDs get listed on the stock exchanges, the investors will have the option to sell them on the exchanges anytime they want.

Demat or Physical Option – Demat account is not mandatory to invest in these NCDs as the investors have the option to apply for these NCDs in physical or certificate form as well.

TDS – Though the interest earned is taxable with these NCDs, DHFL will not deduct any TDS on the NCDs held in a demat form. The investor will have to pay tax on the interest income while filing his/her income tax return.

Should you invest in this issue?

Investors investing just for listing gains were left disappointed when these NCDs from its previous issue got listed at a discount to their face value of Rs. 1,000. Going by such a listing, investors should not expect listing gains from these NCDs too. Interest rates for this issue have been fixed at 9.10% for 3 years as against 9.20%, 9.15% for 5 years as against 9.25% and 9.25% for 7 years as against 9.30% for 10 years. These lower rates will make sure that these NCDs will not list at a significantly higher price as compared to their issue price of Rs. 1,000.

DHFL NCDs trading on the BSE and NSE

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As I mentioned earlier as well, periods of making easy money in the bond markets seems to be over now. Bond yields have fallen sharply in the last 6-9 months, but they are showing signs of stabilisation. It seems debt investments would yield lower returns for the next 2-3 years. In the absence of any significant adverse event, I think 10-year G-Sec yield should remain in the range of 6.90% to 7.40% for the remainder of this calendar year. If that happens, it would be termed as a very passive period for bond trading. In such a scenario, you should not expect any significant price movement in your bond holdings too.

These NCDs are for those investors who want to have higher returns as compared to bank fixed deposits (FDs) or fall in the lower tax brackets of 10% or do not pay tax at all. Investors in the higher tax bracket of 20% or above should avoid these taxable NCDs and explore tax-free bonds or other tax-efficient investments.

Application Form of DHFL NCDs

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in DHFL NCDs, you can reach us at +919811797407

RBL Bank IPO Review – Subscribe or Not?

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

After a prolonged period of lull in the IPO market, sentiment has been gradually improving towards these fresh issues of shares in the last one year or so. A large number of companies have hit the primary markets this year and most of them have remained successful in rewarding their shareholders with healthy listing gains as well as maintaining those gains.

In this series of IPOs, RBL Bank, formerly known as Ratnakar Bank Limited, has also hit the dalal street to get itself listed on the stock exchanges and raise approximately Rs. 1,213 crore from the investors. The issue has already got opened on Friday, August 19th and will remain open for two more days to close on August 23rd.

What’s on Offer?

This initial public offer (IPO) comprises of a sale of approximately 5.39 crore shares to the investors. It is a mix of fresh issue of approximately 3.7 crore shares by the bank and an offer for sale of 1.69 crore shares, primarily by Beacon India Private Equity Fund, GPE (India) Ltd., Elephant India Finance Private Limited, Gaja Trustee Company Private Limited and Capvent India Private Equity Fund.

35% of the issue size is reserved for the retail individual investors (RIIs) i.e. approximately 1.89 crore shares out of 5.39 crore shares on offer, 15% is reserved for the non-institutional investors and the remaining 50% shares will be allocated to the qualified institutional buyers (QIBs).

RBL Bank has fixed its price band to be between Rs. 224-225 per share. There is no discount for the retail investors though. Here are other salient features of this IPO:

Anchor Investors – Anchor Investors have already subscribed around 1.62 crore shares at Rs. 225 per share, thus investing Rs. 364 crore in the offer. Anchor investors include Merrill Lynch Capital Markets Singapore, Goldman Sachs India Fund, Government Pension Fund Global, FIL Investments Mauritius, GMO Emerging Domestic Opportunities Fund, Auburn Limited, HSBC Global Investments Fund, Reliance Capital, HDFC Prudence Fund, SBI Mutual Fund and Nomura Funds Ireland among others.

Bid Lot Size & Minimum Investment – Investors need to bid for a minimum of 65 shares and in multiples of 65 shares thereafter. So, a retail investor would be required to invest a minimum of Rs. 14,625 at the upper end of the price band and Rs. 14,560 at the lower end of the price band.

Maximum Investment – Individual investors investing up to Rs. 2 lakh are categorised as retail individual investors (RIIs). As a retail investor, you can apply for a maximum of 13 lots of 65 shares in this IPO i.e. a maximum investment of Rs. 1,90,125.

Objective of the Issue – RBL will raise Rs. 832.50 crore from this issue and the company plans to use the proceeds to augment its Tier-I capital base, lending book and investment portfolio and to comply with RBI’s Basel III norms and other guidelines. RBL also wants to enhance its visibility and brand name among its existing and potential customers with this listing.

Listing – The shares of the company will get listed on both the stock exchanges i.e. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) within 6 working days after the issue gets closed on 23rd August. Here are the important dates after the issue gets closed:

Finalisation of Basis of Allotment – On or about August 26, 2016

Initiation of Refunds – On or about August 29, 2016

Credit of equity shares to investors’ demat accounts – On or about August 30, 2016

Commencement of Trading on the NSE/BSE – On or about August 31, 2016

Financials of the Company

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Note: Figures are in Rs. Crore, except per share data & percentage figures.

For the financial year ended March 31, 2016, RBL Bank reported total income of Rs. 3,234.85 crore as compared to Rs. 532.22 crore it reported during financial year 2011-12, registering a growth of 57.02% CAGR during this period. The company reported profit after tax (PAT) of Rs. 292.49 crore for the financial year ended March 31, 2016 as against Rs. 65.10 crore for the financial year ended March 31, 2012, posting a growth of 45.59% CAGR.

Bank’s net interest margins (NIMs) were 2.68% in FY 2013-14, which improved to 3.01% in FY 2014-15, but declined to 2.96% during the last financial year. Asset quality has deteriorated somewhat, but given the market scenario, it is well within investors’ comfort zone.

Should You Subscribe or Not?

Ever since the new management team has taken over the operations of the bank in FY 2011-12, its financials have been consistently improving over this period of four years or so. The bank has shown a consistently high and healthy growth in its operational performance, despite the industry facing a tough time in growing their businesses and keeping their asset quality problems in check. RBL has done both these job fairly well during this period.

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At Rs. 225 per share, the bank is valued at a price to book value (P/BV) of 2.45 times and price to earnings (P/E) of 23.44 times. If the bank is able to grow its EPS by 40% this year as well, then its offer price of Rs. 225 per share would look distinctly attractive at an estimated P/E ratio of 16.74 times and P/BV ratio of around 1.95 times.

As the market sentiment is fairly positive at this point in time, this IPO looks extremely attractive from listing gains point of view. Also, if the bank is able to successfully grow its lending book and keep a check on its asset quality in a similar manner as it has been, I think this bank has a potential to easily provide more than 50% returns in the next 12-24 months. However, the investors should keep a close eye on its growth numbers with a bigger base and also its asset quality metrics. Any slowdown in growth or deterioration in asset quality should warrant a change in the long term strategy of investors.

DHFL 9.30% Non-Convertible Debentures (NCDs) – August 2016 Issue

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

After the successful issue of Edelweiss Housing Finance Limited (EHFL), DHFL, or Dewan Housing Finance Limited, is coming out with its issue of Non-Convertible Debentures (NCDs) from the coming Wednesday i.e. August 3, 2016. These NCDs will carry coupon rates in the range of 8.83% to 9.30%, resulting in an effective yield of 9.20% to 9.30% for the individual investors.

Though the issue is scheduled to close on August 16, it is likely that it will get oversubscribed prior to its closing date. Given a bumper response to the Edelweiss Housing Finance NCDs issue, there should be a reasonably high demand for this issue as well.

Before we take a decision whether to invest in this issue or not, let’s first check the salient features of this issue.

Size & Objective of the Issue – The company plans to raise Rs. 4,000 crore from this issue, including the green shoe option of Rs. 3,000 crore. The company plans to use the issue proceeds for its lending and financing activities, to repay interest and principal of its existing borrowings and other general corporate purposes.

Coupon Rate & Tenor of the Issue – The issue will carry coupon rate of 9.20% p.a. for a period of 3 years (36 months), 9.25% p.a. for 5 years (60 months) and 9.30% p.a. for 10 years (120 months). Investors will have the option to receive interest on a monthly, annual or cumulative basis.

CPI Linked Floating Interest Rate NCDs – This is the most unique feature of this issue. The company has decided to offer CPI-linked floating interest rate to its Series X NCD investors and there will be a ‘Floor’ as well as a ‘Cap’ on the interest rate. Floor has been set at 8.90% p.a. and Cap at 9.50% p.a. The specified spread will be 4.18% p.a. for Category III & Category IV investors. For the first year, reference CPI has got calculated at 5.02% p.a., so it is 5.02% + 4.18% = 9.20%.

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Suppose, we have 4.72% as the reference CPI for the next year. In that case, the rate of interest will be 8.90% for the second year.

Categories of Investors & Allocation Ratio – The investors have been classified in the following three categories and each category will have the below mentioned percentage fixed in the allotment:

Category I – Qualified Institutional Bidders (QIBs) – 20% of the issue i.e. Rs. 800 crore

Category II – Non-Institutional Investors (NIIs) – 20% of the issue i.e. Rs. 800 crore

Category III – High Net Worth Individuals (HNIs) including HUFs – 30% of the issue is reserved i.e. Rs. 1,200 crore

Category IV – Resident Indian Individuals including HUFs – 30% of the issue is reserved i.e. Rs. 1,200 crore

Allotment on First Come First Served Basis – Subject to the allocation ratio, allotment will be made on a first come first served (FCFS) basis in each of the investor categories, based on the date of upload of each application into the electronic system of the stock exchanges.

NRIs Not Allowed – Non-Resident Indians (NRIs), foreign nationals and qualified foreign investors (QFIs) among others are not eligible to invest in this issue.

Credit Rating & Nature of NCDs – CARE and Brickwork Ratings have rated this issue as ‘AAA’ with a ‘Stable’ outlook. Moreover, these NCDs will be ‘Secured’ in nature.

Listing, Premature Withdrawal & Put/Call Option – These NCDs will get listed on both the national exchanges i.e. Bombay Stock Exchange (BSE) as well as National Stock Exchange (NSE). The listing will take place within 12 working days after the issue gets closed. Though there is no option of a premature redemption, the investors can always sell these bonds on the exchanges.

Demat, Physical Application – Demat account is not mandatory to invest in these NCDs as the investors have the option to apply for these NCDs in physical or certificate form as well.

TDS – Though the interest income would be taxable with these bonds, NCDs taken in demat form will not attract any TDS. The investor will have to pay tax on the interest income while filing his/her income tax return.

Should you invest in DHFL NCDs?

In 2013-14, when G-Sec yield was ruling above 9%, investors were scared to invest in debt securities due to negative returns on their investments. With falling yields on Government Securities (G-Secs) and corporate bonds, interest rates on various investment products like fixed deposits (FDs), post office small saving schemes, non-convertible debentures (NCDs) and tax-free bonds have all fallen by 1% to 2.5% in the last two years or so.

Now, with a fall in bond yields and 15-20% appreciation in bond prices, investors are chasing theses debt investments. But, I think that period of making easy money is over now and it would be very difficult for us to have similar returns going forward. Investors should not expect returns in double digits now on.

That being said, these rates of 9.20% to 9.30% do not attract me much, despite the issue being rated as ‘AAA’ by the rating agencies. I would rather prefer SBI NCDs yielding ~8.50% or Tax-Free Bonds yielding ~7% or equity mutual funds earning an average annual return of 15% or so. Conservative investors should avoid these NCDs and explore other options like post office saving schemes, tax-free bonds, debt mutual funds or other listed NCDs.

Investors, who are not required to pay any tax on their annual taxable income or who fall in the 10% tax bracket or who have high degree of confidence in the execution capabilities of DHFL’s management, can consider investing in these NCDs for a period of 3 years or at max 5 years. I personally avoid longer term investment periods with private companies, so would advise my clients too to avoid the 10-year option in this case.

Application Form of DHFL NCDs

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in DHFL NCDs, you can reach us at +919811797407