L&T Infra's bond issue seems to be a suitable investment for those who have still not invested in infra bonds for tax saving. But others can give it a miss
Issue details:
Company Name: LTIF
Issue Size: 200 cr
Face Value: 1000/ Bond
Issue Date: Oct 15-NOV 2
L&T Infrastructure Finance (LTIF) is coming out with an infrastructure bond to raise capital to fund its growth plans. The move comes on the back of LTIF being accorded the status of infrastructure finance company (IFC). While the issue terms are on similar lines to the earlier issue of IDFC, investors should consider investing only for the tax rebate attached to it.
BACKGROUND:
As per the current norms, IFCs can raise up to 25% of their gross disbursements in FY10 through bonds. While the company is not publicly listed, bonds would be tradable on the National Stock Exchange, post the lock-in period of five years.
While a portion of the proceeds might be used to meet the issue expenses, majority of it will be used for boosting its infrastructure lending business. Earlier this month, IDFC also came out with a similar bond issue.
With the government providing the tax shield for investments in infrastructure bonds over and above the maximum limit of Rs 1 lakh under Section 80C of the Income-Tax Act, other IFCs might also hit the market with similar issues.
BUSINESS:
Set up in 2007 as a nonbanking finance subsidiary of L&T, the company is primarily focused on providing debt finance to infrastructure projects. The company was given the IFC status in July 2010. It can thus access long-term funds to meet its growth plans. To add to this, the limit of bank financing and external commercial borrowings has also increased.
The company has a diversified disbursement mix with the power sector forming almost 39% of its advances. Apart from this, the company also provides financing to companies in the telecom, roads, oil and gas, ports and other infrastructure sectors such as logistics, SEZs, etc.
FINANCIALS:
LTIF has grown at a fast pace since its inception. The company recorded a 60% compounded annual growth rate (CAGR) in its total income in the past three years. Total income for FY10 stood at Rs 4,504 crore. The surge can be attributed to the rise in loans or advances. Net loans of the company almost doubled in FY10 to Rs 4,255 crore. Last year, LTIF saw almost 50% hike in its interest costs. Even after this, the increase in net profit has been substantial. Net profit at the end of FY10 stood at Rs 110.8 crore, up 45% from the year-ago period. In fact, the company averaged 57% growth in net profit since FY08.
Moreover, the company is adequately capitalised with its capital adequacy ratio being 22% vis-à-vis the 15% minimum required for an IFC. A strong capital base will help the company scale up operations at a fast pace.
RETURNS ON INVESTMENT:
The company is issuing the bond in four different series (see table). Though the bond seems to be giving a yield of 7.75% or 7.5%, based on the series chosen, the actual yield to investors will be higher accounting for the inherent tax advantage in the bond. To add to this, investors will have the option to redeem the principal from the company at the end of 5 or 7 years.
Assume an investor in the tax bracket of 30.9%, who invests in the Series 3 of the bond issue and intends to exercise the buyback option at the end of five years.
The yield on investment for such an investor could go as high as 13%, considering the tax benefit in the first year and annual tax-adjusted interest income.
If not for the attached tax benefits, the yields and lock-in of these bonds mean investors would be better off investing in other avenues such as bank fixed deposits.
