Power Finance
Corporation – Tax Free Bonds – Dec’12 Subscribe
Power Finance Corporation is a “Navaratna” company of
Government of India. It is engaged in
the business of lending and advisory services from project conceptualization to
post commissioning for clients in the power sector.
Issue Details:
PFC is issuing “Tax Free Bonds” , which are secured,
redeemable and non-convertible debentures to an extent of Rs1000 crores, with
an option to retain up to Rs4,590 crores of oversubscription.
|
Face Value
|
Rs1000 per Bond
|
Minimum Application
|
Rs 5000 or 5 Bonds
|
|
Interest Rate
|
7.69% for 10 years option
7.86% for 15 years option
|
Mode of Allotment
|
Dematerialised and Physical Form
|
|
Credit Rating
|
Crisil - AAA; ICRA – AAA
|
Listing
|
Bombay Stock Exchange
|
|
Issue Open
|
14th Dec 2012
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Issue Closes
|
21st Dec2012
|
Financial Details
of PFC:
·
Existing profit making PSU – FY 2011-12 profits
of Rs3031.74 crores
·
EPS – Rs23.41 for FY 2011-12
·
Loan Assets at Rs140,819.21 crores as of 30-Sep-2012
·
Consistent growth in loan assets and profits
over the last 5 Financial Years
Tax Benefits:
·
Tax Free Bonds – Interest income fully exempt
·
No Wealth Tax applicable
·
Since it is a listed bond, benefits of
indexation available in case of sale in stock exchanges
Investment Recommendation:
The PFC tax free
bonds are an attractive investment opportunity for resident individuals who are
in the highest tax slab. With the
interest rate expected to move southward from 2013, the tax free rate of 7.69%
for 10 years and 7.86% for 15 years is on the higher side.
This issue has a highest credit rating from Crisil and ICRA
indicating sound credit quality and prudent asset recognition norms, which
lends a high degree of security to the investors. The listing of the shares on
the stock exchanges provides an excellent window for exiting the investment if
need arises in the future.
On the downside, committing funds for a minimum period of 10
years is required. There is a
possibility of interest rates moving against the investor is there, though the
chances of it are very low over the next 10 years. The asset book is skewed towards power
sector, which is going through a difficult phase all over India. The State Electricity Boards which are one of
the primary borrowers of PFC is in doldrums across many states in India. Considering that there is a major reform
process initiated in the power sector recently by the Central Government and
most of the state electricity loans are guaranteed by the respective state
governments, the possibility of default is limited. But the risk is definitely there.
Verdict:
Considering the overall risk profile of PFC and its good
performance over the last several years, we think it is an attractive
opportunity to lock-in some money at the current rates. This is a good quality debt instrument with
add on benefits like tax free status, easy liquidity through stock exchange
listing.
Couple of caveats is that you should have exhausted your
Provident Fund and Public Provident Fund contribution limits before you look at this. Secondly, you should
remain in the tax slab of 30% during the entire tenure of the investment. That is, it may not be suitable for people
who are going to retire in the next few years.
We recommend the investors to go for the ten year option. Yes, NRIs can also invest.
If you need any assistance in investing in this Bond issue,
please feel free to write to me at
venkytuty@gmail.com
or call me on +91 98415-67379.
Disclaimer:
This is not an invitation to subscribe to the Tax free bond
issue of PFC. You should consult your
personal financial advisor or take your own decision on this investment. Please read the offer document completely
before making any investment decision.
Disclosure:
The author or his firm, Acuwealth Advisors, may or may not
be investing in this bond issue. Also,
if you decide to invest through us, we may be getting some commission from the
product manufacturer.
