Tax free bonds: Should you buy NTPC or Hudco?

Hudco and NTPC tax free bonds will be offered from 2nd and 3rd December respectively. Which one should you subscribe considering that Hudco rates are little higher and even crossing 9% barrier?
 

NTPC (formerly National Thermal Power Corporation), country's largest power producer and a maharatna company of the government, will offer tax-free secured redeemable non-convertible bonds from 3rd December and close on 16th December. State-owned Housing and Urban Development Corporation (Hudco), a mini-ratna firm, engaged in the financing and promotion of housing and urban infrastructure projects, will offer second tranche of tax-free bonds from 2nd December and is scheduled to close on 10th January.
 

NTPC will offer better rates for 10 and 15 years than the recently closed NHPC bonds. The rate for 20 years is almost unchanged. NTPC coupon rates for retail individual investors will be 8.66%, 8.73% and 8.91% for 10, 15 and 20 year bonds. Hudco will have coupon rate of 8.76%, 8.83% and 9.01% for 10, 15 and 20 years. Retail investor limit for bond application is Rs10 lakh. Non-retail investors will have 0.25% less rate for both the bond issues.
 

While Hudco coupon rates are higher than NTPC by 0.1% for all the tenure, NTPC bonds have better credit rating. It has been assigned AAA rating by ICRA and CRISIL. Hudco has AA+ rating from CARE and India Ratings and Research. Both are government companies and hence it is safe to invest some portion of your investment.


NTPC issue size is Rs1,000 crore with an option to retain oversubscription up to Rs750 crore for issuance of additional bonds, aggregating to up to Rs1,750 crore. Due to small issue size up for grabs and decent rates, investors may have to move quickly if they want their hands on these bonds. NHPC was closed early due oversubscription and NTPC may follow suit. Many NHPC subscribers got partial allotments.

 

Hudco plans to raise Rs2,439 crore its second tranche. It has already raised Rs2,370 crore in the first tranche of tax-free bonds launched in September 2013.
 

It is obvious that Hudco second tranche will have less interest from those who have already subscribed even though the rates are better than first tranche. Hudco also had tax-free bonds offering last financial year, but NTPC did not have it during the same period. Hudco second tranche longer ending date of 10 January 2014 indicates that it will take longer time to get necessary subscription. NTPC ending date is 16 December 2013, but it may be oversubscribed before it.
 

But, should you expect higher rates for tax-free bonds offered in near future? It depends on the 10 year benchmark government security (G-SEC) yield which has seen full circle in the last month by rising steeply from 8.58% to ending at 9.01% on 22nd November and now at 8.72% on 28th November. It is unlikely that rates will come down in near future. It is more likely to go up if RBI hikes the repo rate during the remainder of financial year. It can lead to increase in G-Sec yields, but it is difficult to predict future interest rates with certainty as there are too many parameters that can affect it.
 

IRFC (Indian Railway Finance Corporation), NHAI (National Highway Authority of India), NHB (National Housing Bank) and IIFCL (India Infrastructure Finance Company Ltd) second tranche will have tax-free bonds in near future. 
 

Read –Tax-free Bonds: The Coming Opportunity

Choose your Bond

Comments
hemangini r mistry
8 years ago
client service search of online
R Balakrishnan
8 years ago
Simply choose the one with higher interest rate. After all both are sad companies, but both owned by government of India. So default risk is identical. Credit rating in a PSU is a meaningless thing.
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