Shriram Transport NCD: Invest

Investors can subscribe to the public issue of Shriram Transport Finance's five-year non-convertible debentures (NCDs). Shriram Transport is one of the leading asset financing NBFCs, which predominantly finances second-hand commercial vehicles.

The interest rate on the NCDs payable annually is 11.6 per cent for an investment of less than Rs 5 lakh. For more than Rs 5 lakh, the coupon rate is 11.35 per cent. The interest rate is attractive compared to prevailing bank deposit rates. Most banks offer rates of 8.75 per cent for this tenure. NCDs will be riskier than bank deposits, which are insured up to Rs 1 lakh. However, this issue is secured by a charge on the company's assets. Instruments of comparable companies in the secondary market offer 10.4 per cent, for credit ratings of AA and AA+.

NCD holders can even trade in these debentures in the secondary market, however, there is liquidity risk for premature encashment as the bond market is relatively illiquid.

The five-year NCD has a put and a call option after 48 months. Put option means that investor has an option to sell the NCD while the call option gives the company the option to repay prematurely. The only shortcoming of this issue is the lack of a cumulative option. This subjects investors in the NCD to the risk of lower rates when they re-invest the interest receipts.

Post-tax yields will be lower given the interest income is taxed at effective tax slab of the investor.

While there is a 3-year option with 11.35 per cent available, the 5-year option is more suitable, given that the coupon rate is high and investors have put option after 4 years.

Shriram Transport has more than Rs 36,000 crore of assets under management and Rs 1,230 crore of net profit for the year ended March 2011. Used commercial vehicles account for three-fourth of assets outstanding.

The company enjoys a AA+ credit rating from CARE and AA rating from Crisil, which signify high investment grade.

The capital adequacy ratio of 24.85 per cent as of March 2011 was comfortable.

The company from time to time has been raising capital to adhere to RBI's new capital adequacy norms. The recent requirement of the RBI to provide additional capital may further strengthen NBFCs, which too is good for NCD holders.

The gross NPA ( non performing assets) and net NPA ratio of Shriram Transport are 2.6 per cent and 0.4 per cent respectively as of March 2011.

The business is highly risky given the concentration on vehicle lending, the cyclical nature of the business and the credit profile of the borrowers. Even as the loans disbursed are secured against the assets, there is credit risk arising from the commercial vehicle financing business being exposed to an economic slowdown and high interest rates.

Tighter regulations (like removing priority status to securitised loans raised by NBFCs) may increase the cost of funds for Shriram Transport, putting pressure on interest costs.

The issue size is Rs 500 crore with an option of retaining an additional subscription of Rs 500 crore. The offer is opening on June 27 and closes on July 9. However, the company has an option of pre-closing the issue if it receives the required subscription.

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