Shriram Transport is back with its public issue of non-convertible debenture (NCDs). For those who are unaware of this term, please refer to our article on NCDs by clicking here. Shriram Transport is India largest truck finance provider and has an excellent track record of profitability over the last fifteen years. The company NCD issue has been rated AA by CRISIL, indicating a high degree of safety. The issue details are listed in the table below.

Why we believe its an attractive fixed income opportunity?

We would advise investors to invest in the 5 year NCD yielding 11.1%. While long term investors can hold the NCD for the entire duration of 5 years, medium term investors can look at selling after two years, when there will be 10 to 15% appreciation in the NCD price. Thus, medium term investors can look at earning 15% effective returns at the end of 2 years. Read below why we think its an attractive proposition vis-a-vis bank FDs and other NCDs. The recent currency depreciation could delay the process, but a gradual decline is inevitable.

Attractive yields: Prospero Tree has the view that we are at the peak of an elongated the interest rate cycle and interest rates will be gradually trend southwards over the next two years. There is a good likelihood that this could be one of the last few NCD issues offering +11% interest rates. The benefit for you will be two fold your capital gets locked at a higher yield of 11.1% and you stand to gain from a rally in NCD prices once the interest rates start declining.

Scope of additional returns through capital gains: We have already seen one leg of interest rate softening over the last year. As an illustration, investors in Shriram Transports NCD that listed in July 2011 would have earned 12.1% interest and a 6% capital appreciation over the last two years. Thus, if the investor decides to sell this NCD today, they end up making 15% returns over each of the last two years. Similarly, investors in HUDCO tax-free NCDs (recommended by Prospero Tree in March 2012) would have earned effective pre-tax returns of 17% over the last two years.

What should an investor already having investments in NCDs do?
Investors in tax-free NCDs have already witnessed 10% to 15% capital appreciation over the past one year. For those lying in the 10% and the 20% tax bracket, it makes sense to sell the tax-free NCDs and opt for the current Shriram Transport NCDs. For those in the 30% tax bracket, the relative reinvestment risk is much higher and hence doesn't make sense to switch out for the tax-free NCDs. For a completely new investor, the current NCD option is better than bank FD or even corporate FD as the fixed deposits will not give you capital appreciation. We believe this is a fixed income opportunity that will give you 15% over the next two years.

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