@Leisure - Vol-41 | srei

@Leisure - Vol-41

Newsletter
 

Corporate Bonds in times of falling interest rates

Banks are a safe harbour investment for those who value investment security as paramount. However, as interest rates fall, it is time to seek other investment options. Investors can consider debt investments, which are considerably lower risk than equities and add the element of diversification to investor portfolios. Here is a closer look at why you need to consider alternative investments and what options you may have within debt investments for predictable yet safer returns.

Interest rates are falling: The demonetisation carried out in November 2016 has caused a seismic shift in the Indian investment landscape. Banks are flush with liquidity, but at the same time, there has been low credit off-take from the industry. Inflation too has been muted and thus there is little incentive to raise rates. With the economy craving growth, an era of low interest rates looms ahead.

The alternatives: The debt markets, particularly corporate bonds, are a possible alternative for investors who want to explore new horizons. Corporate bonds have been in the limelight of late with high capital inflows as investors seek choices. A hike in the investment cap for foreign investors has always worked in favour of corporate bonds. Add to that a favourable macro-economic environment - inflation under control, strong rupee and the looming rate cuts - are factors that favour corporate bonds. Investors should note that corporate bonds, such as Non-Convertible Debentures (NCDs) usually offer 100-200 basis points more than fixed deposits in terms of interest.

What you should know: Corporate bonds are issued by companies that need capital for future growth or business purposes. Investors in corporate bonds receive interest and the principal is returned after a fixed maturity period. Corporate bonds are typically either high quality or high yielding. It is important to distinguish between the two. Companies with good management and proven track record of repaying debt usually have lower yields; conversely companies which have not yet built an established track record usually offer higher yields. As an investor, you should do due diligence and examine the track record of the company whose corporate bonds you plan to invest in and study their financial statements. Corporate bonds are usually rated by rating agencies such as CRISIL, CARE, SMERA, Fitch India, etc. You should always pick a corporate bond that enjoys high rating such as AA and above. As an example, SREI’s Non-Convertible Debentures enjoy A+ rating from CARE and BWR AA+ rating from Brickwork1.

Investors should consider adding corporate bonds to their portfolios as it is a higher yielding investment. Good corporate bonds and debentures can provide returns that exceed yields on bank deposits.

 

Srei Equipment Finance Board gives ‘go ahead’ for IPO

  • Srei Equipment Finance’s (SEFL) board has approved raising Rs 2,000 crore through an initial public offering (IPO). SEFL is a wholly owned subsidiary of Srei Infrastructure Finance. The IPO will allow SEFL to dilute 25% stake and raise the value of the company to Rs. 8,000 crore. SEFL operates in the area of equipment finance and provides leasing services for infrastructure, construction equipment and machinery to construction firms as well as SMEs operating in the area of civil and mechanical construction. Srei Equipment Finance has presence across India.
  • IPO Plans: The approval by the board of directors clears the way for the IPO subject to approval of company shareholders, market conditions and receipt of approvals from regulatory authorities. The IPO would involve issuing of fresh equity shares. This has been disclosed in a regulatory filing that the company has made. The IPO is expected to be launched in February-March 2018.
  • Existing shareholders: SEFL board has also given the ‘go ahead’ for participation of existing shareholders of Srei Infrastructure Finance. The company has stated to the regulators, “The fresh issue size shall be reduced to the extent of participation in offer for sale by existing shareholders, if any, as may be decided by the Board of Directors of SEFL or any duly constituted committee thereof, in its absolute discretion in consultation with the book running lead managers appointed in relation to the IPO.”
  • Equity base expands: SEFL has benefitted from a jump in demand recently with equity financing business growing at 20-22 per cent. SEFL has seen revenues rise to Rs, 2,495.33 crore as of March 2017 and generated a net profit of Rs. 148.84 crore or Rs. 24.95 per share. The current equity base of SEFL stands at Rs. 59.66 crore1, which is set to expand due to the planned IPO.

    Going public will help the company to raise funds to propel growth in a segment that is expanding as demand picks up, while, at the same time, increasing its equity valuation.

 
 

Looking for an alternative to savings account?

Savings accounts give easy access to money but also provide very little interest. Typically, you can expect between 3-4 per cent1 interest on a savings account, although some banks may sometimes give more depending on the products they have on offer. Retaining money in a savings account will ultimately result in erosion of your capital as the average inflation rate in India over the past 5 years has been roughly 6 per cent2. Savvy investors are now finding new ways to keep their liquid cash in higher interest or return bearing vehicles to maximise liquidity and returns. Here are some alternatives and options available today:

Corporate Bonds/NCDs: Corporate Bonds and Non-Convertible debentures are issued by companies in order to raise funds. These bonds are typically able to offer interest rates even higher than fixed deposits of banks. Since NCDs can be traded on the markets, it gives them an element of liquidity. Investors can also look at Secured Non-Convertible Debentures that are backed by company assets to add an element of safety to their investments.

Payments Banks: If you are looking for a savings bank type product but are willing to forego some features, you can consider opening an account in the new payments banks that have been introduced. Some payments banks offer rates as high as 7%. Some features that you may take benefits of with these accounts are debit cards and free ATM transactions up to a limit.

Sweep-in accounts: These accounts offer higher interest rates, typically those of a fixed deposit, while offering some benefits of a savings account. The fixed deposit-bank account liquidity link allows customers to withdraw money from a fixed deposit when a certain limit is reached by conducting an ‘auto sweep.’ The reverse is true as well as when a certain limit is reached in your savings account - money is automatically moved to a fixed deposit.

Liquid funds: Liquid debt funds are also an option for investors who want to have higher returns but get some benefits of a savings account. These debt funds invest money in short-term market instruments like treasury bills and government securities as well as call money. Liquid funds can deliver better returns than savings accounts typically and may offer facilities such as an ATM card for withdrawals.

Today’s investors are no longer limited by the savings account. They can get a high element of liquidity as well as enjoy higher returns with other similar investment options, which give the investor the benefit of diversification of liquid holdings as well.

 
 

Buddy Jokes

I try not to borrow, first you borrow then you beg – Ernest Hemingway / Quotes

Q: When does it rain money?

A: When the weather sees a ‘change’.

Q: Why is money referred to as ‘dough’?

A: Because we all ‘knead’ it.

A doctor was examining a very sick old patient. It was clear to the doctor that old fella would not make it. The doctor advised, "Why don’t you make a will?". The patient glanced up from the bed and said, "Oh yes, I have already done that." He then looked up to the doctor and added, "I have left all my money to the doctor who will save my life."

 

Buddy Quiz

Quiz: Fill in the blanks

1. Demonetisation has increased bank …………….

a) Liquidity

b) Risks

c) Branches

2. Companies issue corporate bonds for raising …………….

a) Awareness

b) Profile

c) Capital

3. SEFL board has approved raising Rs. ………… crore through an IPO.

a) 2000

b) 8000

c) 1800

4. NCDs can be ………….. on the markets.

a) Issued

b) Traded

c) Not sold

5. Typically interest rate on a savings account is ……….. per cent.

a) 7-9

b) 3-4

c) 6-7

Answer:1-a, 2-c, 3-a, 4-b, 5-b.