Should you invest in ECL Finance NCD?

Vikram DalalSynergee Capital Services

ECL Finance has planned an issue of Secured Redeemable Non-Convertible Debenture amounting to Rs.400 crores with an option to retain over-subscription upto Rs.400 crores aggregating to a total of up to Rs.800 crores.

The details of issue are as under :-

Rating :- CARE AA(Double A) by CARE and {ICRA} AA (Stable) by ICRA

Interest Payout option:- Monthly, Annual and cumulative

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Category I :- InstitutionCategory II :- Non InstitutionCategory III :- Individuals

Listing:- NSE / BSE

Taxation Implication:-Interest earned on these NCDs will be taxable as per the tax slab of the investor. There is no Tax Deducted at Source (TDS) on NCDs in the demat form. However, TDS will be applicable if the NCDs are taken in the physical form and the interest amount exceeds Rs. 5,000 in any financial year.

Moreover, if these NCDs are sold after being held for more than 12 months, the investor is liable to pay long term capital gain (LTCG) tax at a flat rate of 10.30%. And, if sold prior to the completion of 12 months, short term capital gain (STCG) tax is applicable at the slab rate of the investor.

About the Company:-

ECL Finance is incorporated in 2005 and is a part of Edelweiss group. It is a non-deposit taking NBFC. It has a diversified product bouquet of corporate loans, loans against property, loan against marketable securities, Real Estate Finance Loans, Public Issue Financing, SME Finance and Structured Finance.

Where should you Invest?

Before making an investment decision the following should be kept in mind. 1. Safety 2. Liquidity and 3. Return

While an investor could also look at the Fixed Deposits available in the market, these are not included in our analysis, which is presently restricted to listed bonds (taxable/tax-free).

Taxable Listed NCDs / Bonds:-

Effective yield is calculated as on 23rd February 2015. Subject to availability of Bond at the price.Annual & Cumulative Interest Payout Frequency is taken

Liquidity Constraint:- Though the bonds will be listed on NSE/BSE, due to small size of the issue, it will be difficult to get fine quotes.

Our suggestion:-The Edelweiss group is a reputed and professionally managed organisation. Couple of years back during the crisis in commodity market, the Edelweiss group restrained themselves from taking any exposure for their clients. It conveys their financial prowess and an understanding of the market. The NCD’s are secured in nature. And under falling interest rate scenario, it is a good investment option. The company is in the business of leverage funding against Equity, Bonds, IPO, Real Estate, Structured Products etc. The volatility in financial market, has a direct impact on the company. An investor in 10% and 20% tax slab can take part exposure in the company.

Tax Free Bonds :- Will suggest Tax Free Bonds for High networth individuals, who are paying 30% tax on their income. At present the Tax Free Bonds are available at the yield of 7% YTM. Thus Pre Tax return will be 10.55%. Even the budget makes an announcement for new Tax free Bonds, it will not be issued before October 2015. And the interest rates will depend upon the prevailing 10 year GOI at that point in time. We will strongly suggest to invest in presently available bonds in secondary market.