NCD issue - JM Financial Products: For those with an appetite for some risk

The issue offers attractive interest rates and effective yields

Fixed-income investors have yet another choice to consider. The latest in the list of NCDs (non-convertible debentures) to hit the market is that of JM Financial Products. The NBFC is part of the JM Financial Group, and this is its first NCD issuance. The issue is of secured, redeemable NCDs. It is open from April 22 to May 21, but could close earlier if fully subscribed. The total issue size is ₹1,000 crore, comprising a base issue size of ₹200 crore and an option to retain over-subscription of ₹800 crore.

Issue details

The NCD is rated AA/Stable by CRISIL and ICRA, indicating high degree of safety regarding timely servicing of financial obligations. It comes in three tenures — two, three and five years. The two- and three-year NCDs have both the interest-payout (annual) and cumulative options, while the five-year NCD has only the interest-payout (monthly and annual) option.

In the two-year NCD, the coupon rate in the annual payment option and the effective yield in the cumulative option is 9.9 per cent, while in the three-year NCD, the coupon rate and effective yield are 10.2 per cent. In the five-year option, the coupon rate for the monthly payout option is 10.04 per cent and that for the annual payment option is 10.5 per cent — that translates into an effective yield of about 10.5 per cent. In effect, higher the tenure, higher the effective yield. Interest, whether paid out or cumulated, will be taxed at the investor’s slab rates.

In the three- and five-year options, the company has a call option, that is, it may repay the NCD to the investor at an earlier date. In the three-year option, the company can exercise the call option two years after the allotment; and in the five-year option, three years after the allotment.

The minimum investment is ₹10,000 (10 NCDs) and in multiples of ₹1,000 thereafter. Forty per cent of the issue is reserved for retail investors — those who invest up to ₹10 lakh. The allotment will happen on a first-come, first-serve basis.

About the company

JM Financial Products mainly offers customers multiple secured and unsecured loan products. It has four verticals that are into structured, real-estate, capital-market and SME financing. More than three-fourth of its loan book (about ₹6,700 crore as of December 2018) comes from structured and real-estate financing. The company’s loan book has grown at a healthy pace over the past few years, and it has kept its bad loans under check (gross NPA was 0.3 per cent and net NPA was 0.2 per cent in FY 2018 and in the nine months ended December 2018).

Our take

While the NCD’s rating (AA/Stable) may not be top-notch (AAA), it is still quite high and offers comfort. The company’s financials seem good. Interest rates and effective yields being offered by the NCD are attractive and superior compared with many of the recent NCD issues and with most other fixed-income options currently available in the market.

Interest rates in the market could decline in the coming months with the RBI’s rate-easing approach. Investors with some appetite for risk can consider allocating some money to the NCD.

The three-year tenure seems ideal, offering good rates, while also allowing investors the flexibility to shop for higher rates in the future if the cycle turns.

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