Higher returns at higher risk

The maximum maturity period of the NCD is five years. It offers five investment options. Investment options III and IV come with Put and Call options at the end of 48 months. A Put option gives buyers the right to sell the underlying security at a specified future date and at a specified price,while a Call option gives buyers the right to buy the underlying security at a specified future date and at a specified price. The issue offers coupon rates ranging from 10.75-11.25 per cent. Interest on the NCD is payable on a semi-annual,annual or cumulative basis,depending on the option. The minimum application amount is Rs 10,000,and one can invest more in multiples of Rs 1,000 thereafter. Two of the investment options offer an additional interest rate of 0.25 percentage points to senior citizens. No Tax Deducted at Source TDS is payable on interest income. The NCDs will get listed on the National Stock Exchange NSE,allowing investors to liquidate their investments before maturity.

Company profile

STFC is a part of the Shriram conglomerate that has a significant presence in financial services. STFC is one of the largest asset financing non-banking financial companies in India with a strong presence in truck financing. Over the past four years its income and net profits rose at a compounded annual rate of 81 and 87 per cent respectively.

NCD options

Option I: It pays interest every six months and has an effective yield of 11.30 per cent. Redemption is staggered in the ratio of 40 per cent,40 per cent and 20 per cent at the end of 36,48 and 60 months respectively.

Option II: It pays interest annually. The principal is redeemed as under option I. Senior citizens are offered an extra return of 0.25 percentage points under both these options. The effective yield on this option comes to 11.25 per cent.

Option III: It offers an interest rate of 11.03 per cent compounded quarterly,with the effective yield coming to 11.50 per cent. It is a cumulative option and hence offers the highest yield. This option comes with a put and call option at the end of 48 months.

Option IV: This option pays interest annually. The yield comes to 11 per cent. Put and call option are available at the end of 48 months.

Option V: This option has been designed for those who want to invest for only three years. The interest rate has been capped at 10.75 per cent and there is no Put and Call option. The maturity amount is paid at the end of 36 months.

Taxation

Any interest that you receive will be taxed as other income,that is,it will get added to your total income and taxed at the marginal tax rate. If you sell at the stock exchange after 12 months,your gains will be treated as long-term capital gain and will be taxed at 10 per cent without indexation. If you sell in less than 12 months,your gains will be treated as short-term capital gains and taxed at the marginal income tax rate.

The post-tax returns for a person in the highest tax bracket will be in the range of 7.5 per cent to 8 per cent,provided you hold the issue till maturity, says Vishal Dhawan,a Mumbai-based financial planner.

Comparison with other debt instruments

Let us compare this NCD with other debt instruments such as Company Fixed Deposits FD,Bank FDs,and Post Office instruments such as Monthly Income Scheme and National Savings Certificate.

Risk. The NCD has been rated CARE AA by CARE and AA Ind by Fitch,which indicates that the company is stable and capable of timely servicing of debt. Further,the NCD is secured by the companys assets. Consequently,the claims of NCD holders will be superior to the claims of unsecured creditors like company FD holders,which are unsecured deposits. Bank FDs are insured up to a maximum of Rs 1 lakh.

Commenting on the companys credit rating,Veer Sardesai,a Pune-based financial planner,says: The credit rating of the issue is not the highest,which can be a cause for concern. So after you have bought the issue,keep a close eye on the companys performance and financial health.

Return. The returns from this NCD seem attractive as it offers nearly 100 basis points bps higher returns per annum than a company FD and nearly 300 bps points higher returns than a bank FD or other Post Office instruments see table.

Liquidity. As they are listed on the NSE,these NCDs offer complete liquidity and you can sell them anytime. However,exiting through the secondary market NSE entails interest rate risk if interest rates within the economy have moved up,their price on the secondary market will decline. By comparison,liquidity in case of company FDs and Post Office schemes is low.

Should you invest?

NCDs score over company FDs and Post Office schemes in terms of return and liquidity. However,their higher returns come with higher risk,compared to bank FDs and Post Office instruments. According to Sardesai,If a person has a slightly higher risk appetite,he may opt for this issue.