IIFL Finance is coming up with another tranche of secured non-convertible debentures (NCDs). The offer opens today. The company is looking to raise up to Rs 1000 crore through this issue. The bulk of the issue proceeds are to be used by the non-banking finance company (NBFC) in its regular business of lending.
The debentures come with a face value of Rs 1,000 and the minimum application size is Rs 10,000. The issue has been rated by CRISIL as AA/Stable and by Brickworks as AA+/ negative outlook. AA rating denotes high probability of interest payments and repayment being made on time.
There are seven series on offer across tenures of two, three and five years. The five-year NCD has a monthly pay-out option for those who may need regular income. The others come with annual and cumulative payout options. The cumulative pay-out option can potentially give the best return if you do not need regular income.
At the highest rate of 8.75 percent annualized interest for a period of five years, you can get a post-tax return of 5.7 percent if you fall in highest tax bracket. The NCDs will be listed as well, which means you can exit before the term is completed by selling in the secondary market. If the exit price per debenture is higher than its face value, you earn capital gains. These gains are subject to tax at 10 percent if sold after one year and at your marginal income rate if sold any sooner.
Should you invest?
IIFL Finance has a diversified portfolio of loan products and borrowers. Over the last three to four years, the company has been able to grow its gold loan book, doubling it since 2019. Its Microfinance loans have also grown at a fast pace. Gold loans are typically secured and hence help balance out the loan portfolio. According to the details in the prospectus, nearly 86 percent of the loan book is secured with adequate collaterals. The non-performing assets ratio is 2.1 percent as of March 2021, which is also relatively low, indicating a low-risk loan book. But NPAs have increased compared what they were two years ago. They were at 1.96 percent then. At a consolidated capital adequacy level of around 23.7 percent, it appears to be a well-capitalized NBFC.
According to Vikram Dalal, managing director, Synergee Capital, “The company is backed by strong financials and good management which makes this issue attractive. While the issue will be listed on exchanges, giving investors the option for an early exit, be aware that the secondary market liquidity for such issues is very limited.”
While there are many positives, invest only if you are also willing to take on some of the risks. The biggest concern in case of IIFL as raised by credit rating agencies is the relatively young age of its loan book. Bulk of the growth in the loan book has come in the last three years, this means the cycle is ongoing and experience is limited. Given the COVID pandemic, many borrowers could be struggling with cash flow issues and the impact of that may not be visible for a few more months. Given the company’s strategy to focus on growth from retail assets from under-banked segments, the current economic situation might become a risk.
For risk-averse investors who till now preferred bank fixed deposits and AAA bonds, this issue comes with higher risk and is not a good fit. Neither is it viable to shift equity profits to this issue.
Also, currently listed debentures for IIFL in the secondary market have a better yield. These are not traded every day. However, the latest available trade for IIFL Home Finance 2028 NCD shows a yield of 9.92 percent on the BSE debt segment. Be mindful that secondary market trades are low on liquidity.Given all these factors, retail investors may be better off sticking to the debt mutual fund route or high liquidity AAA bonds and bank fixed deposits for their fixed-income allocation.