Tata Capital opens doors to retail investors

Tata Capital is a non-banking finance company (NBFC), which provides small and
Medium enterprises (SME) loans, retail loans and infrastructure loans. Through its
subsidiaries, the company is also present in fee-based businesses like brokerage, investment banking and portfolio management; however most of its asset book comprises of fund-based assets.
Recently, the company came out with an issue of non-convertible debentures (NCD) offering the yield of 11.57%-12% per annum (p.a.). The issue closes on February 24,’09. Considering the rates on the fixed rate instruments, the issue appears to be attractive. A couple of months back even banks were offering fixed deposit rates (FD) of 11% p.a.
However, the Reserve Bank of India (RBI) has cut the key rates dramatically leading to a low interest rate regime. Therefore, the banks have cut the FD rates. Going ahead, it seems unlikely that the banks will offer interest rates exceeding 10% p.a.
This makes Tata Capital’s issue of NCD even more attractive as the investor is assured of 12% p.a. at least for the first three years of the bond’s tenure. After 36 months, there is a put/call option, which means that the company and the investor have the option to redeem the bond. Moreover, NCD is a secured instrument, which adds to its creditworthiness unlike FD, which is not a secured instrument
The issue is coming at a time, when the economy is slowing down. As a result, most of the banks and NBFCs have gone slow on disbursements in order to take stock of the asset quality. Gone are the days, when NBFCs were expanding at high rates of 50% p.a. The outlook is challenging for companies in financing business. Tata Capital has said that it will be focussing on the companies within the Tata ecosystem. The company is prohibited from lending to the companies of the Tata Group.
However, it can lend to the suppliers and vendors of Tata Group companies. This is where it stands a great advantage, as sector expertise is crucial while deciding upon the borrower. And, it takes years for financing companies to build expertise and to this extent Tata Capital does have a head start. The company also has presence in big-ticket personal loans, where the repayment risk is much lower than low size loans. The slowdown has been severe to the markets which the company is targeting namely SME, personal and infrastructure loans. However, the slowdown fears are more relevant to bigger players, which have already tapped the market. As far as Tata Capital is concerned, its asset book stood at Rs 8,000 crore approximately on Sep 30,’08.
The company plans to raise maximum of Rs 1,500 crore with the current NCD issue.
Moreover, it has adequate capital to deal with any eventuality. Its capital adequacy ratio stands at 26.1% much higher than the 10% prescribed by RBI.
A strong capital base indicates that company has been efficiently managing the liquidity risk and it intends to scale up the operations. All these factors combine minimize the repayment risk on this NCD issue from an investor’s perspective. Moreover, ICRA and CARE, the credit rating agencies, have assigned LAA+ and AA+ rating to the issue, thereby affirming the company’s creditworthiness. It seems that the company wants to build a relationship with retail investors. This is evident as the minimum an investor can invest is Rs10,000. In a nutshell, it seems worthwhile for investors to subscribe to Tata Capital’s NCD considering that it is a secured fixed rate instrument, the yield is higher than other instruments, there is a lock-in of three years and the company has strong brand name. Basic understanding of its borrowers in SME space is an added advantage

Source:Economicstimes