'NHAI tax-free bond issue attractive, retail to lap-up'

The National Highways Authority of India will start the sale of tax-free bonds on Thursday, December 17 with a plan to raise Rs 10,000 crore. The issue closes on December 31.Ajay Manglunia, Senior VP, Edelweiss Financial Services expects the issue to be oversubscribed on the first day in the first few hours itself because it is very attractively priced.     NHAI is offering two basic tenures, the ten-year one for 7.14 percent and 15-year for 7.35 percent but retail participants will get 25 basis points over and above that which is offered. Therefore, investors will get it 7.39 percent and 7.60 percent interest on 10 and 15 year maturities. Manglunia expects investors to participate aggressively.Securities will be listed on the BSE and NSE and the proceeds will be used to fund road projects. The minimum application size is 5 bonds per individual and maximum application size for retail category is Rs 10 lakh.NHAI had earlier allotted tax-free bonds worth Rs 3,872 crore via private placement route on September 18, 2015.Below is the transcript of Ajay Manglunia’s interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18. Anuj: We recently saw Indian Railway Finance Corporation (IRFC). It was oversubscribed three or four times, we had 10,000 crore of bids and now we have National Highways Authority of India (NHAI), again, Rs 10,000 crore size here. Would you expect some similar interest here and what is leading to this kind of interest? A: After a very long time, the quality issuances with the tax efficiencies are available in the market, especially with the issuances like IRFC and NHAI offering decent returns. And with the uptick in the government security yields, they are able to offer slightly better yields that the last issuances. So, that is what is keeping investors a little more enthusiastic about applying on the day one, because these issuances typically have first come first served basis. The investors who apply on the day one, definitely get an allotment. In the last four issuances which we have seen, like started with Power Finance Corporation (PFC) and then NTPC was the first one to raise and then the public sector undertaking (PSU), then the Rural Electrification Corporation (REC) and then the IRFC, all these issuances have got decent response from the investors, especially all the categories getting oversubscribed on the day one. So, we expect thought NHAI is a slightly larger in the size, but they are offering very decent rates especially in the 15 year segment , they are offering the highest yield and the other tax free, the investors will definitely try and put in their applications and the money on day one. We though, have the Fed rate hike decision on December 16, evening. But that is something which is more or less discounted and people are expecting that they have to take an appropriate call, but NHAI subscription should not get any kind of adverse because of that. Sonia: In fact, I was coming to the yield NHAI is offering. What is the kind of interest that investors will get from this NHAI offering and how does it compare to the other offerings in the past like IRFC, PFC, etc? A: Say, NHAI is offering two of the basic tenures. One is 10 years. In the 10 year segment they are offering 7.14 and in the 15 year segment, they are offering 7.35. The retail investors will get 25 basis points over and above this. The earlier tranches of the various issuances were – NTPC and PFC were more or less around these levels, but IRFC and REC were 5-10 basis points lower than this. But looking at NHAI’s attractiveness and slow gearing, this is something which is rarely available. So, people will be little more aggressive in terms of putting in money. I think a lot of investors were waiting for NHAI to come to the market because in any other issuances, they could not get a firm allotment. But in NHAI, probably, looking at its size and, reservation for retail is 14 percent, so out of Rs 10,000 crore, Rs 4,000 crore are reserved for retail investors which are upto Rs 10 lakh. So, hopefully they will be able to get a better allotment in the NHAI issue. Anuj: Since a lot of retail audience would be watching this programme. How would investment in an issue like this compare to investing in gilt funds. What would be the key differentiator? A: The key differentiator is the tax efficiency over here. In the gilt fund, the gilts are subject to taxation. The returns from the gilts are subject to taxation. Whereas the returns on this instrument is completely tax free. So, the investors in the highest tax bracket will have at least 30-35 percent better in terms of tax free returns. Sonia: So, in all likelihood, NHAI will get lapped up in the first one day, ne hour, couple of hours itself, like we saw with IRFC. Any more tax free bonds that one can look out for? Any more issuances that are coming up in the next 2-3 months? A: We have NHAI again to come up back because they have allocated the highest allocation in the tax free bucket. So, they have totally Rs 24,000 crore to raise from the market out of which they have done about Rs 4,000 crore in the private placement. This is tranche of Rs 10,000 crore, so they are left with another Rs 10,000 crore to be raised from the market. After NHAI, probably there will be Electrical Research and Development Association (ERDA) and Hatco which are the two entities who have been allocated to raise tax free. So, Hatco in fact has done about Rs 1,000 crore private placement, so balance amount, they will come to the market for the public issue. ERDA again, they have done a little bit of private placement, so they have been allocated Rs 2,000 crore, so they will again come back to the market. So, these are the two entities but NHAI is NHAI. So, probably people are waiting and would like to lock in. Maybe, the subsequent issuances, depends on the yield, because these are priced at 80 basis points lower than the g-sec yields over the last two weeks. So, the g-sec yields being at an elevated level right now, NHAI pricing is the best as of now.