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Piramal Capital & Housing Finance (PCHFL), a deposit-free housing finance company of the Piramal group, comes out with a guaranteed issue of NCD (non-convertible debentures) of ₹ 200 crore with an option to keep an oversubscription of up to ₹ 800 crores. The offer is open from July 12 to 23, 2021. This is the first tranche of the proposed 2,000 crore to be raised by the house’s financier.
What’s on offer
There are five series, I through V, with terms of 26, 36, 60 and 120 months offering a fixed interest rate. With the exception of Series II, which is a cumulative option, all other series have an annual interest payment option (coupons). Series II offers a return of 8.35% on an NCD at 26 months. The other four non-cumulative series offer a coupon payment of 8.35% to 9.00% per annum for NCDs with terms of 26 to 120 months.
While the coupons offered are attractive, especially given the current low interest rates, they likely reflect the higher risk. PCHFL takes over distressed mortgage lender Dewan Housing Finance Corporation (DHFL) with the risk that this will impact the quality of the loan portfolio and the capital adequacy of the combined entity.
NTMs have been rated CARE AA (CWD), i.e. under credit watch with developing implications by CARE Ratings and [ICRA] AA (Perspective: Negative) by ICRA. This is lower than the AAA rating assigned to debt securities with the highest degree of security. A negative outlook indicates the possibility of a rating downgrade. Investors who care most about capital security should invest a portion of their debt allocation in AAA-rated secured CRSs.
Up to 40 percent of the Tranche I issuance has been reserved for retail investors to be allocated on a “first come, first served†basis. Investors should request a minimum of 10 NCD (₹ 10,000) which can be split across the five series and in multiples of 1 NCD (₹ 1,000).
About the issuer
PCHFL is a wholly owned subsidiary of Piramal Enterprises. It provides wholesale finance (the bulk of the loan portfolio) to real estate developers, businesses and SMEs in all sectors and retail finance, including consumer housing finance. PCHFL had a loan portfolio of 32,354 crore and a net NPA (non-performing assets) of 1.90% as of March 31, 2021. Home loans made up more than three-quarters of the housing finance company’s loan portfolio.
Non-real estate business financing represented 7.1 percent and personal loans 13.7 percent.
Between FY19 and FY21, PCHFL reported a 4% drop in operating income to 5,082 crore and a 15.3% drop in net income to 1,034 crore. The PCHFL is however well capitalized with a weighted capital / risk ratio (CRAR) of 32.30% as of March 31, 2021, well above the mandatory limit of 15%.
Last month, the National Company Law Tribunal approved the buyout of (DHFL) by PCHFL for 34,250 crore. The merger of PCHFL with DHFL, when completed, will help the former to expand its personal lending portfolio and improve its mix of wholesale and retail lending. It will also benefit from DHFL’s existing branch network. However, investors should be careful of the risk that DHFL’s loan portfolio decreases the asset quality of the merged entity, which also affects the currently high capital adequacy ratio. As of March 31, 2020, DHFL had a loan portfolio of 66,203 crore and a negative net worth of ₹ 5,538 crore.
Interest earned on CRS will be taxed at the rate of the income tax slab. The NCDs purchased at the time of issue and held until maturity (both at their nominal value) will not result in any capital gain and therefore no tax. In all other cases, any capital gains will be taxed. According to Archit Gupta, Founder and CEO of ClearTax, if NCDs are sold after being held for up to 12 months, short-term capital gains, if any, will be taxed at your slab rate. If NTMs are sold beyond that, a 10% non-indexed long-term capital gains tax plus an education and higher education tax of 4% will apply.
Other options
Those who are reluctant to take too much risk can choose from relatively safer AAA rated bonds. For example, according to data from HDFC Securities, Tata Capital Financial Services bonds (series – 845TCFS22 Individual) with a residual maturity of 1.15 years are available in the secondary market at a yield to maturity (YTM) of 7, 10 percent. The YTM shows your total return (CAGR) assuming you buy the bonds today and hold them until maturity. One notch lower, the AA + Shriram Transport Finance Company bonds (series – STFC YK Individual) with a residual maturity of 2.03 years are available at a YTM of 7.77 percent.
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