Indian equities have had a roller coaster ride this year, and so too have commodities. In volatile times like these, investors would be seeking out instruments that offer both safety and decent returns.
Meanwhile, the debt side of the market is flooded with an array of tax-free bond issues like Rural Electrification Corporation (REC), Housing and Urban Development Corporation (HUDCO), Infrastructure Finance Company Ltd (IIFCL) and Power Finance Corporation (PFC).
The latest addition to this list is state-owned miniratna company National Hydroelectric Power Corporation (NHPC) which will hit the market with its maiden tax-free bonds issue worth Rs 1,000 crore on October 18. The issue will close on November 11, this year. Nearly 40 percent of the issue will be held for retail investors. The issue is rated AAA by ratings agencies CARE, India Ratings and ICRA.
Apart from being tax-free, these bonds have caught the fancy of retails investors due to return they are offering (coupon rates) and ofcourse safety of capital since they are public sector companies.
So, is it time to switch to debt from equity? Moneycontrol.com spoke to personal finance experts to know if they would advise retail investors to bet their chips on NHPC tax free bonds.
Investors are always advised to diversify their long term portfolio with tax free bonds, says a report by Bangalore based personal finance consultancy firm WealthRays Group. Interest from tax free bond does not form part of the total income, also, wealth tax is not levied on investment in bonds, it adds.
The NHPC issue currently offers highest coupon rate in the market. It promises to pay 8.43 percent p.a. for 10 years, 8.79 percent for 15 years and 8.92 percent for 20 years to retail individual investors. For qualified institutions buyers, corporate and high net worth individuals, the coupon rates are 8.18 percent p.a. for 10 years, 8.54 percent for 15 years and 8.67 percent for 20 years, respectively.
Looking at the fundamental strength of the company and the interest rates offered, investors who wish to invest money at this point of time can consider their longer period options of 15 years and 20 years, says Financial Advisor Arnav Pandya. The amount of the NHPC issue for retail investors is relatively small, so those wanting to invest would do well to put their money immediately after it opens, he suggested.
Nominal default risk
NHPC is a government owned entity and hence risk of default on payment of interest and principal amount are minimal which is evident from CARE AAA rating. Bonds are listed on recognized stock exchanges (NSE/BSE), however investors are advised to hold bonds for long term and not look for listing gains as being “AAA” rated, NHPC bonds are expected to be more liquid and demand premium on listing, the WealthRays report explains.
According to the company's press release, these bonds are rated “ICRA AAA” by ICRA; “IND AAA” by IRRPL and “CARE AAA” by CARE. Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.
Company profile and future plans
NHPC is the largest hydro power generating company in the country with a total aggregate generation capacity of 4,024 MW as on March 31, 2013. The total generation capacity including capacity of its subsidiary NHDC Ltd stood at 5,544 MW representing nearly 14% of aggregate hydro power capacity of India as on March 31, 2013. It plans to add over 10,000 MW of hydropower capacity by the end of XII plan (year 2017). Net sales and operating profit of the company are expected to grow at a CAGR of 4 percent and 5 percent over 2012 to 2015E respectively, the report says.
The paid-up capital of the company of 31st March 2013 stands at Rs 12,300.74 crore. Its net-worth is Rs 27,840.50 crores. Sales realisation during 2012-13 was Rs 5,369 crore as against Rs 4,415 crore during 2011-12. It reported more than 7 percent increase in net profit at Rs 719.93 crore for the first quarter ended June 30, 2013 versus Rs 669.81 crore a year-ago. Total income climbed to Rs 1,619.73 crore in the June quarter from Rs 1,424.45 crore in the same period a year ago.
The flip side…
Every coin has two sides, says a famous adage. Likewise, on one hand fixed income products like bonds give guaranteed returns and security, there are some features which should not be neglected either.
Such bonds are non-cumulative in nature which means the interest earned will be paid out annually and at the end of the tenure, the investor will get his principal back. So, one should follow a disciple of parking those interest amounts in other instruments and get benefit out of it, says Sumeet Vaid, CEO, Ffreedom financial planners.
“NHPC tax free bonds are likely to be most popular for those falling under the highest tax bracket. Ideally, this product best fits investors looking for regular tax-free annual income and not for those looking to earn monthly income. Retired investors can look to invest here because it would provide regular annual income which is tax free and risk free. Most importantly, investors should be ready to give up his liquidity or say it will eventually block the liquidity if invested in these bonds as the maturity is for a longer period,” he elaborated.