LT Finance is issuing NCD’s for Rs 500 crs through its IPO which opens today and closes on 22nd of February 2010. The issue is not as attractive as it was last time around when the issue had come in August 2009. More details on the issue tomorrow.

Very rarely does one look for listing gains in a debenture issue but this issue was very well received. In early trading today the debentures of Rs 1000 face value had made a high of Rs 1055. 

Listing gains is a term associated with the equity markets. Yes readers you are absolutely correct and I am not wrong either. Here is an opportunity where you can make sure shot listing gains even in a NCD issue. To make things better with the markets being so topsy- turvy and extremely volatile, this is a good time to make some quick but sure money and also take a break from the markets. Let us travel back in history to January 2009 when Tata Capital raised money from the issue of NCD. The stock markets were in a fairly depressed condition and they offered a coupon rate of 11% to 12% depending on the various schemes and options. In July August 2009 Shriram Transport Finance had a similar NCD issue and they offered a coupon rate of between 10.75% and 11.5%.

L&T Finance has very strong parentage and is a wholly owned subsidiary of L&T Capital Holdings Limited, which in turn is a wholly owned subsidiary of Larsen and Toubro Limited. The company has an asset base of 5218.64 crs as on 31st March 2009. The company had a total income of Rs 830 crs with a profit after tax of Rs 99 crs for the year ended March 2009. The net non-performing assets were 2.04% and the returns on assets were at 1.85 %.

The Business

The company’s business is divided into two segments namely corporate finance and retail finance which account for 37% and 63% of the total assets respectively. Under the corporate finance segment, the company is into Leasing, channel Finance, receivables discounting, asset backed term loans and capital market products. Under the retail finance the offerings include Construction Equipment finance, transport equipment finance, rural finance, micro finance and distribution of products such as insurance and mutual funds. The last product is purely a fee based product unlike others which are fund based. L&T Finance is in operation since 1994 and is registered with the Reserve Bank of India as a NBFC. The company is managed by professionals and has people at the top who have been there from the inception of the company adding to its competence and performance.

The offering of non convertible debentures is secured by a first pari passu mortgage on immovable property specified in the Prospectus and an exclusive first charge by way of mortgage on movables being the receivables arising from Construction Equipment, Lease/Hire Purchase/Term Loans, Loan against Securities, etc., as specifically identified from time to time, aggregating up to 1.10 times of the outstanding NCDs, in favour of the Debenture Trustee.

The issue of Tata Capital NCD is trading in a range of Rs 1118-1125 which at the coupon rate of 12% translates into a yield of roughly 8.5%. Two things to be noted in this calculation are that the redemption amount would be the face value which is Rs 1000, hence there would be a loss of Rs 120 over the next three years and secondly there is a call put option which allows the company to buy back the paper at the end of 36 months. Against this L&T Finance is offering a annualized yield of between 9.85 – 9.95% for the 60 month tenure and 10.5% for the 10 year paper. Keeping this in mind I believe L&T Finance paper is likely to trade at a yield of just around 9%. Even as this article is being written, my sources have informed me that the QIB and HNI portion have been oversubscribed on day one itself.

As a sweetener, the company is offering interest of 7% on allotment and 2.5 % on non allotment money. Consider this with liquid funds where the yield hovers between 4 and 5%. I believe this is an excellent opportunity for retail investors to not only earn interest but also capital appreciations (about 5%) and also have their capital secured. The icing on the cake is, this is money on call and gives a fair amount of return.

SEBI Disclaimer: – I have applied for the issue.

The company is offering five different option plans with varying terms of maturity ranging from 36 months to 60 months. The rate of interest varies from 10.75% to 11.5%. STFC is a company in the financing of used or pre-owned vehicles. It also finances new vehicles provided the vehicle owner is an existing customer of the company. STFC has as of date over six lac customers and has as part of its assets under management over nine lac vehicles.

The company’s issue of NCD’s have been rated ‘CARE AA+’ by CARE and rated ‘AA (ind)’ by Fitch. STFC has been borrowing through fixed deposits for a very long time. This instrument now offers security to the traditional fixed deposit and has attractive interest rates and various time options. It may also be noted that there is no deduction of TDS (tax deducted at source) for resident debenture holders. Coming to the financials of STFC which is a registered NBFC with RBI and has a track record of over 30 years, they are impressive on all counts. The company recorded a total income of Rs 3731.13 crs and a net profit of Rs 612.40 crs for the year ended March 2009. The AUM or (assets under management) were at an impressive Rs 23281.11 crs as on 31st March 2009. The NIM (net interest margin) was at 6.99% while the Capital adequacy ratio at a healthy 16.35%. The net NPA’s (non performing assets) were at 0.83%.

If one were to look at the growth it is even more impressive. The AUM has grown at a CAGR (compounded annual growth rate) of 68% over the period 2005-2009. Over the same period Revenues have grown at a CAGR of 81.26% from Rs 345.69 crs to Rs 3731.13crs, while profit after tax has grown at a CAGR of 87.7% from Rs 49.32 crs to Rs 612.40 crs. The company has introduced a new initiative in the form of truck Bazaars to provide a suitable platform for counseling and buying and selling of commercial vehicles on a single platform and thus create a vibrant ‘used vehicle market’ . The other initiative from the Company is embarking on tapping local markets through developing partnerships with private financiers, who dominate the unorganized regional pre-owned commercial vehicle financing market.

The issue is open for three weeks and we normally see that people invest only at the last moment. The issue being a fixed income instrument has an added sweetener where interest would be given on application money provided allotment is made at the rate of 8% and at the rate of 2.5% if the application amount is refunded. Senior citizens would be entitled to an additional rate of interest of 0.25% in option one and two.

Very clearly STFC has come a long way and is poised to go further. Investors looking at fixed income with security should invest in this instrument. There is a choice of as many as five options to suit the individual needs.