Fixed Income
Is Religare Finvest’s NCD worth investing in?

Rising bad loans and negative cash flows of the past three years do not inspire confidence

 

Religare Finvest, a subsidiary of Religare Enterprises with its focus on SME financing and retail capital market financing, is looking at raising a corpus of Rs500 crore through an issue of non-convertible debentures. The NCD issue offers debentures of five types, termed as series I to series V and the tenure and coupon rate vary across categories in the following sequence:

 

Is it worth investing in this issue? The issue enjoys a rating of AA- from CARE and ICRA, similar to what the NCD issue of India Infoline holds, with an interest rate of 12.75%. Higher interest rate is attractive but remember higher the interest rate, the higher is the risk. 

 

The NCD of India Infoline was of a subordinate nature, which means in case the company gets liquidated the principal debtor will be serviced before the investors investing in this NCD issue. The Religare Finvest NCD, however, is in the form of secured debt with ‘first floating pari passu charge’, which means that the debt is fully secured and is not subordinate to other debt providers. In case of liquidation of the company and your debt is secured against immovable property of the company, if any. 
 
The real risk is the business environment of the company. The company is focussed on financing SMEs for mortgage loans, commercial loans and working capital loans. This possibly includes funding promoters. The profits rely completely on the net interest margins and the interest income earned, which will be directly hit by interest rate volatility in the markets.
 
Also, the business requires substantial amounts of capital at all times for lending aggressively, and any disruption of sources of funding will have an adverse effect on liquidity which could hit the bottomline. 
 
If customer default rises, it has to be provided for and that will take toll on profits and tie-up capital. A quick glance at the financials of the company reveal that gross NPAs (non-performing assets) have massively risen from Rs86.21 million on 31 March 2011 to Rs1,067 million on 31 March 2012 and the Net NPAs have increased from Rs17.71 million on March 31 2011, to Rs645.60 million on March 31 2012, which paints a gloomy picture.
 
The capital adequacy ratio of 19.65% is very near to what the minimum stipulated amount of 15% by the RBI. In case aggressive lending does not continue, the company might have to raise additional capital, a step that could weaken the company’s financial ratios. 
 
The current asset liability mismatch is another worrisome factor. The loan portfolio of the company is skewed towards providing loans of big ticket size to few borrowers, and thus the risk of default by one increases the risk financial underperformance of the company. As on 31 March 2012, the principal amount outstanding to top 20 borrowers on an unconsolidated basis aggregated Rs26.63 billion while total loan assets amounted to Rs125.74 billion, or about 20%. Any deterioration in the asset quality of any of these exposures will affect income from operations and thereby profitability. Bear in mind the fact that the operating cash-flows have been continuously negative for the past three years.
 
The financials of the company are not strong enough to sustain huge amounts of debt for a long term. The issue has come up in a marginally falling interest rate situation, when the profitability of all lending companies is expected to take a hit. Considering all these factors it is best to avoid this issue. 
 

User

COMMENTS

PPM

4 years ago

Why to put the amount in million and billions - why not in lakhs and crores?

It is confusing to read in crores in some places and millions & billions in another places.

Is it a ploy to downplay the NPAs by putting it in Millions, instead of Crores?

Piyush I Shah

4 years ago

Why analysis on Religare NCD only & why Not on all ongoing/upcoming NCD in current month. Even though according to your analysis & rating given to each current issues by rating agencies, it may not be worth of Investor's grade but an unbised report of all would have helped common man people, 'Aam Aadmi' to decide/select/choose from Bad, Ugly, Poor, or Worthless..!!??

mani thyagarajan

4 years ago

why did u wait till the INDIA INFOLINE NCD got closed for subscription and then published it on 13th sep 12? So U r also doing a disservice to the public

thyagarajan

REPLY

raj

In Reply to mani thyagarajan 4 years ago

13th Sep 12 article was on Religare NCD and not India Infoline NCD. Religare NCD opens today (14th Sep). India Infoline NCD article was well in time.

R Balakrishnan

In Reply to mani thyagarajan 4 years ago

If you are a regular reader, you would have got to read it on 4th of september, well before the issue closed.

Higher IPO graded companies enjoy better valuation: CRISIL

Higher IPO graded companies will most likely command higher multiples in the longer run as fundamentals will overrule the quintessential emotions of greed and fear, says a study conducted by the ratings agency


A study by ratings agency CRISIL pointed out that companies with higher initial public offering (IPO) grade command superior valuation driven by stronger fundamentals that may overrule quintessential emotions of greed and fear.
 
“For the period under review, these companies also weathered the business cycles like global financial turmoil in 2008-2009, followed by a slowdown during 2011-2012, better on the back of robust business fundamentals, superior management strength and good governance practices,” CRISIL said in a release.
 
CRISIL Research’s analysis concludes that IPO grades assigned to companies and the P/B multiples at which they trade have a strong correlation. The analysis highlights the premium assigned to companies with strong business fundamentals, superior management strength and governance practices (key factors that determine a company’s IPO grade), it said.
 
According to the study, companies with an IPO grade of 5/5 (indicating strong fundamentals relative to other listed securities in India) enjoyed a median P/B (price to latest book value of the company) of 3.79x vis-à-vis 0.33x and 0.45x for companies with IPO grades of 1/5 and 2/5, respectively. Companies with IPO grades of 4/5 and 3/5 had P/B multiples of 1.49x and 1.00x, respectively. 
 
Similarly, companies with an IPO grade of 5/5 enjoyed a median P/E (price to 12-month trailing earnings per share) multiple of 15.7x vis-a-vis 8.3x for companies with an IPO grade of 2/5. Companies with IPO grades of 3/5 and 4/5 traded at median P/E multiples of 9.0x and 10.6x, respectively. However, the median P/E multiple of 12.7x for companies with IPO grade 1 was an exception as many companies reported extremely low earnings per share (EPS) thereby resulting in high P/E ratio (low EPS = high implied multiples), the ratings agency said.
 
CRISIL Research analysed the performance of these graded companies over a five-year period between May 2007 and June 2012 on the basis of valuation multiples like P/B and P/E.  
 
CRISIL said its analysis confirms that there is a strong correlation between the IPO grades and the valuation multiples commanded by them. Higher IPO graded companies will most likely command higher multiples in the longer run as fundamentals will overrule the quintessential emotions of greed and fear, it added.

 

User

COMMENTS

Piyush I Shah

4 years ago

Can one know How Reliance Power got 5/5 grade for its IPO & how it IPO price was justified & there are still more such incidence & cases. Can any one explain!?

REPLY

PPM

In Reply to Piyush I Shah 4 years ago

Ask SEBI chairman and the Finance Minister.

No stay on Kudankulam plant, SC agrees to examine its safety

While refusing a stay on the fuel loading at KNPP, the apex court said public safer is of prime importance and people living in the vicinity of the plant should know if their lives would be protected

 
New Delhi: The Supreme Court on Thursday refused to stay loading of fuel for nuclear power plant at Kudankulam but agreed to examine the risk associated to the project, saying safety of people living in its vicinity is of prime concern, reports PTI.
 
"Public safety is of prime importance. There are poor people living in the vicinity of the plant and they should know that their life would be protected," a bench of justices KS Radhakrishanan and Deepak Misra said while posting the matter for hearing on 20th September.
 
The bench, which refused to stay the fuel loading after the centre assured the court that commissioning of the plant will take place at least two months, said it would go through the judgements of the Madras High Court and hear the matter.
 
"We are neither against the plant nor the petitioner but we want to see that recommendations of the Atomic Energy Regulatory Board (AERB) on the safety measures have been implemented," the bench said.
 
The Centre was represented in full strength with Attorney General GE Vahanvati, Solicitor General Rohinton Nariman and Additional Solicitor General Mohan Parasaran vociferously opposing the plea for staying fuel loading.
 
The Centre said the plant is "completely safe". Since all the recommendations made by the Board cannot be put in place in one go, it would be implemented in due course within six months to two years, it said.
 
The court was hearing an appeal by social activist G Sundarrajan against the High Court's decision refusing to impose any restraint against the plant.
 

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