Debenture 2019Fixed income investors are spoilt for choice today. The secured non-convertible debenture (NCD) issues of as many as three firms – Muthoot Homefin (India) Limited, Magma Fincorp, and L&T Finance – are opening today for investors. The interesting thing about these NBFCs is that they are all different. While Muthoot Homefin is a play on affordable housing, Magma is all about asset-backed financing for new and pre-owned auto and utility vehicles mostly. L&T Finance is a diversified play given its exposure to rural, real estate and wholesale finance. If you had Rs 1 lakh, we would want you to invest 60% of it in L&T Finance NCDs while putting 20% each in Muthoot and Magma offerings. Read on to know why.

NCD ratings

When you get an NCD, you have given a small loan to the company. The NCD ratings are an indication of the issuer company’s financial preparedness to repay. The better the ratings, the lower is the interest rate (because the lower are the chances of default). L&T Finance is offering the highest rated NCDs. The offer is rated as [ICRA] AAA / Stable (pronounced as ICRA triple A with Stable outlook), CARE AAA / Stable (pronounced as CARE triple A with Stable Outlook), IND AAA / Stable (pronounced as IND triple A with Stable outlook).

The other two are ‘AA’ rated, which are below the ‘AAA’ rating. Magma Fincorp NCDs proposed to be issued under this Tranche I Issue are rated as BWR AA / Stable (pronounced as BWR Double A) (Outlook: Stable) by Brickworks Ratings India Private Limited and ACUITE AA/ Stable by Acuite Rating & Research Limited erstwhile known as SMERA Ratings & Research Limited. Muthoot Homefin’s NCDs are rated AA/Stable by CRISIL.

Interest rates

We are writing this piece for HNI and retail investors. So, the interest rates mentioned will be for these investor categories.

In line with the ratings, L&T Finance’s ‘AAA’ instruments are offering you coupon i.e. interest rate, ranging from 8.66% per annum (for 5 years tenure/monthly interest payment) to 9.05% (for 8 years/annual interest payment).

Muthoot Homefin is offering a minimum interest rate of 9.25% (2 years/monthly interest payment) to a maximum of 10% (5 years/annual interest payment).

Magma Fincorp is offering the highest interest rate. It is offering a minimum 10.04% interest rate (5 years/monthly interest payment) and a maximum of 10.75% (10 years/annual interest payment). This is possibly Magma’s first NCD public issue and so it is wanting to give the best return to attract investors.

Additional Read: Shriram City Union NCD Offers Up To 9.75%; Here Are The Pros And Cons

Three NCDs

NCD issuer name Rating Interest range per annum (HNI and retail)
L&T Finance ICRA AAA and CARE AAA 8.66% to 9.05%
Muthoot Homefin CRISIL AA 9.25% to 10%
Magma Fincorp BWR AA and ACUITE AA 10.04% to10.75%

RupeeIQ take – We believe a portfolio approach should be taken when it comes to these NCD offerings. It is not a question of one against the other. All the issues are from NBFCs, and are reasonably good businesses. But, it is important to construct the portfolio properly. Safety first is an important motto. So, the core portion i.e. 50-60% of your money should go into L&T Finance NCD issue. The 9% coupon rate is pretty good. The rest 40-50% of the money may be divided in equal proportion into Muthoot Homefin and Magma issues. The above 9% and 10 interest rates are attractive, but use these instruments to give a return kicker to the solid core built by L&T Finance.

Since the interest on debentures received by resident debenture holders is subject to tax at the normal rates of tax in accordance with and subject to the provisions of the I.T. Act, NCD investments make more sense compared to bank FD investments for those in the higher income-tax slabs. Investments in NCDs is all about striking the right balance between risk and return.

Disclaimer: The article is only for informational purposes. Investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on contact@rupeeiq.com