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Edelweiss Financial Services NCD Issue: Should you invest?

The proceeds from the NCD issue are to be used towards repayment of financial obligations, rather than growth

December 07, 2021 / 04:20 PM IST

Edelweiss Financial Services is issuing non-convertible debentures and the first tranche is available to investors from December 6, 2021 for subscription of up to Rs 500 crore.

Investors will have to option to choose from ten series of debentures spread across tenures of 24 months to 120 months. The coupon offered ranges from 8.75-9.70 percent a year, with monthly, annual and cumulative interest pay-outs.

They come with a face value of Rs 1,000 and you can invest a minimum of Rs 10,000. You can invest and hold only in dematerialized form, hence a demat account is necessary for this issue.

What’s good

Edelweiss Financial Services is a diversified business group. It has 10 associate companies spread across, lending, wealth management, asset management, capital markets, insurance and asset reconstruction businesses among others.

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Despite the earnings setback due to the pandemic, the company has added positively to profits in FY21 and revived growth in some businesses.

For investors looking to get some regular income through debt allocation, this issue offers a good interest rate at a time when bank fixed deposit rates are low. At the same time, the spread-out maturities mean that you can choose the tenure that suits you. The bonds will be listed, which means you get the option of an early exit.

What’s not

The issue is rated AA- with negative outlook by CRISIL. The company operates in an industry and business environment that is highly uncertain at the moment. This adds to the risk of the issue. Moreover, its associate businesses, be they capital markets, wealth or asset management, operate with low margins. Insurance is still loss-making, with a long gestation period expected.

The net interest income for credit NBFCs in the group has fallen substantially since 2019. For ECL Finance, net interest income is down to Rs 650 million in FY21 as compared to Rs 13196 million in FY19; this will take some time to catch up. Despite a large contribution from other income in FY21, the consolidated PAT for the year, at Rs 2539 million, is also much lower than the Rs 10,443 million level in FY19.

Non-performing assets have increased as a proportion of the total book and provision ratio is lower as compared to FY19. Given that the financial health of the company appears to be in recovery mode, any adverse external shocks can impede further improvement. Moreover, proceeds from the issue are to be used towards repayment and financial obligations, rather than growth.

The security offered to debenture holders is rights on general receivables, which are hard to navigate in case of a default in payment.

Given the uncertainties and risk, in the current environment, it’s best to be mindful of how much you choose to allocate to this issue.

What should you do?

According to Deepak Chabbria, chief executive officer and director, Axiom Financial Services, “Investors who seek safety of capital above all, should not switch into NCDs. For investors who understand the risks, the 24-month option is an opportunity to take advantage of the yield. There is limited long-term visibility, and hence higher maturity period is avoidable.”

In your overall fixed-income portfolio, do not allocate more than 5-10 percent for this NCD, provided you understand the risks. Else, it is best to give it a miss.

According to Kavitha Menon, a SEBI registered investment advisor, “Mutual funds and managed investment avenues are a preferred choice for individual investors. Doing granular due diligence for each security becomes very tedious.”

There are no guaranteed pay-outs in NCD issues and you have to decide based on your assessment of the company’s ability to fulfil its financial obligations.
Lisa Barbora is a freelance writer. Views are personal.
Tags: #invest #NCD
first published: Dec 7, 2021 04:19 pm

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