Listed bonds & debenture - Attractive options for investment!
Listed Corporate Bonds & Debentures Listed Corporate Bonds & Debentures – Attractive options for Investment December 10, 2012Top Picks from Listed Corporate Bonds & Debentures: Last Tenor Daily Residual Interest Latest traded Coupon Call / Put to Call YTC AverageIssuer Series HSL Scripcode Tenor Maturity payment Record YTM (%) Price Rate (%) Date / Put (%) Volume (Year) frequency Date (Rs) (Yrs) (Nos)Tax Free BondsAAA RatedREC 812REC27 REC812NBNR 1086 8.12% 15 Yrs 14.32 Annual 16-Jun-12 NA NA NA 3251 7.51%Power Finance Co 830PFC2027 PFC830N6NR 1079 8.30% 15 Yrs 14.17 Annual 28-Sep-12 NA NA NA 4400 7.50%AA+ RatedHUDCO Series – 1 HUD810N3NR 1102 8.10% 10 Yrs 9.26 Annual Nil NA NA NA 768 7.45%HUDCO Series – 2 HUD820N2NR 1111 8.20% 15 Yrs 14.26 Annual Nil NA NA NA 4427 7.61%Taxable BondsAAA RatedSBI N3 STABANN3NR 10860 9.75% 10 Yrs 8.29 Annual 16-Mar-12 17-Mar-16 3.29 8.97% 66 9.32%SBI N5 STABANN5NR 11251 9.95% 15 Yrs 13.29 Annual 16-Mar-12 17-Mar-21 8.29 8.90% 264 9.17%AA+ Rated Residual Maturity- Below 24 monthsShriram Transport Finance STFC N2 SRTRANN2NR 645 11.25% 5 Yrs 1.73 Annual 15-Mar-12 NA NA NA 195 12.91%TATA Cap Fin Serv TCFSL N3 TAT105N3NR 1066 10.50% 2 Yrs 1.25 Annual Nil Nil NA NA 373 11.54% Residual Maturity- Above 24 monthsShriram Transport Finance STFC NR - Indivi SRTRANNRNR 1000 11.15% 3 Yrs 2.68 Annual Nil NA NA NA 248 12.84%Shriram Transport Finance STFC NM SRTRANNMNR 1040 11.35% 5 Yrs 3.61 Annual 15-Mar-12 13-Jul-15 2.61 13.05% 57 12.71%AA- Rated Residual Maturity- Below 24 monthsManappuram Finance MFLNCD3 MFLNCDN3NR 1016 12.20% 2 Yrs 0.76 Semi Annual 31-Aug-12 NA NA NA 654 14.44%Religare Finvest Limited O2C2 RFL2C2N5NR 1058 12.15% 3 Yrs 1.81 Annual 29-Mar-12 NA NA NA 417 13.68% Residual Maturity- Above 24 monthsMuthoot Finance MFINNCD2D MUTFIN2DNR 1130 NA 5.5 Yrs 4.13 Cumulative Nil NA NA NA 226 14.83%India Infoline Fin IIFLFIN N4 INDINFN4NR 1023 11.90% 5 Yrs 3.71 Annual 23-Mar-12 NA NA NA 2045 13.94%Prologue: Debt instruments called fixed income securities are issued by a wide range of organizations like the Central and State Governments, statutorycorporations or bodies, banks, financial institutions and corporate bodies. They are an essential component of anyone’s portfolio which offer safety ofmoney invested, adequate liquidity, and flexibility in structuring a portfolio, easier monitoring, long term reliability and certainty of returns from investmentmade.Indian Debt market is majorly dominated by the Government Securities which account for the highest share of total market capitalization. The G-Secsmarket plays a vital role in the Indian economy as it provides the benchmark for determining the level of interest rates in the country through the yieldson the government securities which are referred to as the risk-free rate of return in any economy. Besides G-Sec market, there is an active market forcorporate debt papers in India which trade in short term instruments such as commercial papers and certificate of deposits issued by Banks and longterm instruments such as debentures, bonds, zero coupon bonds, step up bonds etc.Segments: In addition to the equities segment (where corporate bonds and debentures are listed and traded), both the NSE and BSE have tradingsegments called Wholesale Debt Market (WDM) and Retail Debt Market (RDM). The WDM segment is essentially wholesale in nature where deals arenegotiated in lot sizes of Rs 5 crore. The active participants in WDM are commercial banks, mutual funds, financial institutions, insurance companiesand others. The Gilts (G-Secs) are the main traded instruments in WDM. Retail Debt Market platform was introduced for retail investors where they canbuy and sell debt securities from different locations in the country through registered brokers and their sub brokers. However to encourage participation,corporate bonds and debentures are normally listed and traded on the regular Capital Markets segment.Particulars BSE NSENumber of Companies whose bonds and NCDs are actively traded 9 11Total number of Series of bonds/NCDs that are actively traded 48 85Recent shift: In India, most of retail investors prefer debt mutual funds to participate in the debt market investments. However, the participation directly indebentures in the primary as well as secondary markets has been increasing in present days given the more bond offers, ample liquidity in thesecondary markets and higher coupon rates that are provided to the retail investors, etc. Investors can actively participate and transact in the in thesebonds that are listed on the stock exchanges. These bonds are listed along with equities in the exchanges in NSE and BSE to offer the operationalflexibility of the equity segment. The prices that are shown in the exchange platforms are "dirty price" which means that the price is including theaccumulated interest from the last interest payment date to the date. The other term this is called as “clean price” that does not include the accumulatedinterest. Hence the buyer of the bond does not need to pay over and above of the quoted price (excluding transaction charges). Investors those whonames are appearing in the list on record date are eligible to receive the interest payment. Normally, record dates are fixed 15 days prier to the interestpayment date for these securities.Types of bonds: Among the debt securities listed in the market, we consider only actively traded debt instruments that are in the secondary marketssuch as NSE and BSE. Further, they are classified as Taxable and tax free bonds. The interest on the taxable bonds is subject to tax at the normal rateswhile the interest on the tax free bonds is exempted from income tax. It is worth noting that tax free bonds are merely tax free on the interest earned.They are not capital gain bonds. Financial institutions such as Shriram Transport Finance Co, L&T Finance, TATA Cap Fin Serv, SBI, India InfolineFinance, Shriram City Union Finance, Muthoot Finance, Manappuram Finance, Religare Finvest Limited have issued taxable Non ConvertibleDebentures that are traded actively in the secondary markets. State Run Institutions such as NHAI, PFC, IRFC, HUDCO and REC have issued tax freebonds. All the mentioned securities provide ample liquidity in the exchanges they are traded. The bonds are further classified as AAA, AA+ and AA-bonds according to their credit ratings.Retail Research 1
Liquidity: Liquidity plays important role for trading those debt securities. Apparently speaking, debt instruments with higher credit quality are most populartrading instruments having ample liquidity in the secondary markets. Liquidity in bond market is driven by volume of bonds offered by issuers in theprimary market on an on-going basis as well as the circulation of bonds in the secondary market with active investor participation. Larger participation ofinvestors reduces impact costs for both buyers and sellers and ease liquidity problems leading to a lower discount/premium of the bond.Factors determining the values of the bonds:i. Interest rates: The market value of the securities is inversely affected by movements in interest rates. When rates are rising, market prices of existingdebt securities will fall, as demand increases for new-issue securities with higher rates. As prices decline, yields are brought into line with the prevailingrates. When rates are falling, market prices will rise, because the higher rates on outstanding debt securities will be more valuable. Here, too, the marketworks to align the yields with prevailing rates. Downward trends in interest rates also create reinvestment risk, or the risk that income or principalrepayments will have to be invested at lower rates.Relationship between Prices of bonds and Yields of 10 Yr G Sec Benchmark:Muthoot Finance - N6 NHAI - N1 1100 Clo se P rice (LHS) 9.2 1120 Clo se P rice (LHS) 8.8 1 Yr G Sec B enchmark Yield (RHS) 0 1 Yr G Sec B enchmark Yield (RHS) 0 1080 8.7 9.0 1100 1060 8.6 1040 8.8 1080 8.5 1020 1000 8.6 1060 8.4 980 8.3 8.4 1040 960 8.2 940 8.2 1020 920 8.1 900 8.0 1000Feb-12 8.0 Mar-12 May-12 Jun-12 Jul-12 Oct-12 Nov-12 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Nov-12 Sep-12 Sep-11 Sep-12 Apr-12 Aug-12ii. Credit rating: The safety of a fixed-income investor’s principal depends on the issuer’s credit quality and ability to meet its financial obligations. Issuerswith lower credit ratings usually have to offer investors higher yields to compensate for the additional credit risk. A change in either the issuer’s creditrating or the market’s perception of the issuer’s business prospects will also affect the value of its outstanding securities.Meaning of credit rating symbols: Rating agencies use simple alphanumeric symbols to convey credit ratings. For example, CRISIL assigns creditratings to debt obligations on three basic scales: the long-term scale, the short-term scale, and the fixed deposit scale. To illustrate, CRISILs long-termcredit rating scale and the description associated with each category on the rating scale is given below.Symbol (Rating category) Description (with regard to the likelihood of meeting the debt obligations on time)AAA Highest SafetyAA High SafetyA Adequate SafetyBBB Moderate SafetyBB Inadequate SafetyB High RiskC Substantial RiskD DefaultNote: Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negativeconnotations whatsoever. However an issue with a rating carrying a negative symbol is mildly inferior in terms of credit rating compared to another issuewith similar rating without the negative sign.iii. Inflation or Purchasing Power Risk: The other major influence on bond prices is inflation. Rising inflation is damaging to bond prices, because, unlessthe bonds are index-linked, the income they generate will fail to maintain its buying power. To compensate for this dwindling buying power, prices of thebonds typically fall. When inflation is on the increase, bond prices fall, and yields rise. When inflation is decreasing, bond prices rise, and yields fall.Tax Implication:Particular Tax Free Bonds Taxable Bonds No. Interest income is not tax free. Interest earned would Yes. Interest Income is tax free. (exempt u/s 10(15)(iv)(h)Interest Income be treated as “Income from other sources”, and taxed as of the Income Tax Act, 1961). per investors tax slab. No. Since the interest Income on these bonds is exempt, No. As the debt security is issued in a dematerialized formTDS no Tax Deduction at Source is required. and is listed on recognized stock exchange in India. Yes. Under section 2 (29A) & 2 (42A) of the Income Tax Act, the Bonds are treated as a long term capital asset if theLong Term Capital Gains same is held for more than 12 Months where they are subject to the tax at the rate of 20% of capital gains with indexationRetail Research 2
or 10% of capital gains without indexation. Short-term capital gains, where bonds are held for a period of not more than 12 months would be taxed at the normal taxShort Term Capital Gains rates.STT Securities Transaction Tax (STT) is not applicable on transactions in the Bonds. As per section 56(2)(vii) of the I.T. Act, the gift shall be taxable as the income of the recipient where the aggregate fairGift Tax market value of which exceeds Rs. 50,000.Wealth Tax No wealth tax is levied. A 2% education cess and 1% secondary and higher education cess on the total income tax (including surcharge forCess corporate only) is payable by all categories of tax payers.Below are the charts that portray the price (unadjusted) movements of Taxable and Tax free bonds and the total traded quantity (in numbers) in theexchange. The sudden drop in the price line denotes the interest payout of interest for the respective periods.Price movement of the Muthoot Finance NCD Series N6 (taxable bond) since launched: 1100 25000 Total Traded Quantity (RHS) 1080 Close Price (LHS) 1060 20000 1040 1020 15000 1000 980 10000 960 940 5000 920 900 0 May-12 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Jun-12 Jul-12 Oct-12 Nov-12 Sep-11 Sep-12 Apr-12Price movement of the NHAI N1 (tax free bond) Series N6 since launched: Aug-12 1120 50000 Total Traded Quantity Close Price 45000 1100 40000 35000 1080 30000 1060 25000 20000 1040 15000 10000 1020 5000 1000 0 Feb-12 Mar-12 May-12 Jun-12 Jul-12 Oct-12 Nov-12 Sep-12 Apr-12 Aug-12Market Terminology:YTM is yield to maturity - Annualised yield that would be realized on a bond if the bond was held until the maturity date. It basically measures the totalincome earned by the investor over the entire life of the Security.Yield to call (YTC) is the annualised rate of return that an investor would earn if he bought a callable bond at its current market price and held until thecall is first exercisable by the issuer.Maturity: Securities are issued for a fixed period of time at the end of which the principal amount borrowed is repaid to the investors. The date on whichthe term ends and proceeds are paid out is known as the Maturity date. It is specified on the face of the instrument. In respect of Demat Debt instrumentdue date is known from ISIN Number of the security.Coupon rate and Yield: The difference between coupon rate and yield arises because the market price of a security might be different from the facevalue of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.Retail Research 3
Record date/shut period: G-Sec/Bonds/Debentures keep changing hands in the secondary market. Issuer pays interest to the holders registered in itsregister on a certain date. Such date is known as record date. Securites are not transferred in the books of issuer during the period in which suchrecords are updated for payment of interst etc. Such period is called as shut period. For G-Secs held in Demat form (SGL) shut period is 3 working days.Face Value, Premium and Discount: Securities are generally issued in denominations of 10, 100 or 1000. This is known as the Face Value or Par Valueof the security. When a security is sold above its face value, it is said to be issued at a Premium and if it is sold at less than its face value, then it is saidto be issued at a Discount.Primary Dealers: Primary Dealers can be referred to as Merchant Bankers to Government of India, comprising the first tier of the government securitiesmarket. Satellite Dealers are working in tandem with the Primary Dealers forming the second tier of the market to cater to the retail requirements of themarket.Options: There are embedded options such as Put and Call attached to NCDs.Call Option: A callable bond could be called or redeemed by the issuer before the maturity of the bond. Issuer will call away the bond when the bond wasissued in a high interest rate environment and interest rates fall subsequently. Investor will lose the high interest or coupon payments and will be left withredemption proceeds to be invested in a lower interest rate environment.Put Option: A putable bond works in an exactly opposite way where the investor can sell the bond to the issuer at a specified price before the maturity ofthe bond if the interest rates go up after the issuance and investor has higher yielding investment options available.Callable bonds are preferred by the corporation while investors prefer putable bonds. All things equal, a callable bond would trade at a lower price thanthe putable bond.Secured and Non Secured NCDs: Non Convertible Debentures are generally classified as secured and unsecured based on security of investedamount. Secured NCDs are secured by a charge on the assets of the company. The holders of secured debentures have the right to recover theirprincipal amount and the unpaid amount of interest on such debentures out of the assets mortgaged by the company. Unsecured NCDs do not carry anysecurity with regard to the principal amount or unpaid interest.Analyst: Dhuraivel Gunasekaran.RETAIL RESEARCH Fax: (022) 3075 3435Corporate Office: HDFC Securities Limited, I Think Techno Campus, Building –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg(East), Mumbai 400 042 Fax: (022) 30753435 Website: www.hdfcsec.comDisclaimer: Debt investments are subject to risk. Past performance is no guarantee for future performance. This document has been prepared by HDFC Securities Limitedand is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to betaken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate orcomplete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from timeto time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients.Retail Research 4