NHPC and PFC tax-free bonds are offering identical returns. 8.92% tax-free returns from AAA-rated bonds for 20 years; it is a decent option for those in higher tax bracket. Should you go for NHPC, PFC or IIFCL bonds that are being offered or wait for future offers?

After the recent tax-free bond issues by Rural Electrification Corporation (REC), Housing and Urban Development Corporation (HUDCO) and  Infrastructure Finance Company Ltd (IIFCL), savers can expect to lock-in good rates from PFC and NHPC public issue of secured, redeemable tax-free bonds. Power Finance Corporation (PFC) launched on October 14^th while NHPC will open from October 18^th. Both are offering same rates, which are the highest so far. The coupon for retail investor (up to Rs10 lakh) coupon rates at 8.43%, 8.79% and 8.92%pa for 10, 15 and 20 years, respectively. The other bond in the market is IIFCL (till October 31^st).
 

HUDCO (closed 14^th October) with rating of AA+ was not great option considering that IIFCL with AAA rating offered better rates. IIFCL has a loan portfolio concentration in the road and power sectors which have dependency on regulatory and environmental approvals. With AAA rated PFC and NHPC rates eclipsing the IIFCL offer, savers may overlook IIFCL. They may invest in PFC, NHPC or possibly wait for better offers in future.
 

Tax-free Bonds: The Coming Opportunity
 

The future rates depend on the 10 year benchmark G-Sec yield. While it was flat over a period of one month, it rose sharply from 8.2% on 19th September to 8.87% on 23^rd September as a result of rate tweaks by the Reserve Bank of India (RBI) in its mid-quarter credit policy review announced on 20^th September. It has fallen after that to be around 8.5% today. RBI may step up bond purchases to ease liquidity pressure ahead of the upcoming busy season and that may soften yields on G-Secs. It means that rates in future can be lower than today, but no one can say that with certainty as there are too many parameters that can affect it. India's inflation is at a seven-month high in September mainly driven by higher food prices points to possible interest rate hike by RBI at its policy review later this month. It can lead to increase in G-Sec yields.
 

So, for those in the 20% and especially 30% tax bracket, may lock with 8.92% for 20 years for some portion of their debt portfolio or hope to get higher rates in the next issue. PFC provides and arranges finance for the electrical power sector. The business is similar to REC and hence those who have subscribed to REC in the current or previous fiscal/subscribed to PFC last fiscal, can avoid PFC. It is better to diversify your investments across different companies and this is the first time NHPC has been issuing these tax-free bonds through a public issue. NHPC is a mini ratna category-1 enterprise of the government with an objective to plan, promote and organise an integrated and efficient development of hydroelectric power in all aspects.
 

The rates of tax-free bonds this fiscal is almost 1% higher than what was offered last financial year. The retail investor response has been much better than last year, even though due to size of the issues especially due to green-shoe option with the company to retain oversubscription and multiple issues running at same time, there has been ample time for retail investor who did not have to rush in during the opening of subscription.
 

But, NHPC issue is of smaller size with retail investors offered only Rs400 crore as compared to Rs1,550.36 crore to be invested in the PFC issue. If you are keen on NHPC bond offering, you may have to hurry. In December 2012, PFC Tranche-I offering of 7.86% tax-free bonds had poor show as it managed to get only Rs497 crore till one day before the issue closes. This was much below the Rs1,000 crore issue size and no where close to Rs4,590 crore that it wanted to mop up by the end of last financial year.
 

Poor show of PFC tax-free bonds is a hurdle for the deluge of new offerings about to come