Buy IIFL Finance NCD to earn double digit returns

MUMBAI: Investors with a strong risk appetite could consider the unsecured Non Convertible Debentures (NCDs) offer by IIFL Finance. With the NCD offering 4-5% more than the safest fixed deposits and company having the backing of strong investors like Fairfax and CDC Group, investment advisors said investors should allocate a small portion of their portfolio to the product.

IIFL Finance, which is rated AA by Crisil, is offering NCDs worth Rs 1,000 crore including a base issue size of Rs 100 crore and a green-shoe option to retain oversubscription of up to Rs 900 crore. The NCDs, which will be issued in demat form only, opens on March 3 and closes on March 23 with an option of early closure.

The NCD with a tenure of 87 months (7 years and 3 months) gives investors three options. In the monthly option, they earn 9.6%. In the annual option, the rate is 10%, while those opting for cumulative interest earn 10.03%.

The interest rate offered by bank deposits is an average of 5-5.5%. NCDs of lower-rated companies like IIFL finance offer higher rates because they are unsecured and the environment is tough for NBFCs. Investors have burnt their fingers in financial companies such as DHFL and Reliance Home Finance, which defaulted on their payments.

“Given the risk which NBFCs carry and low liquidity of NCDs, retail investors should allocate only a very small amount, typically 3-5% of their fixed income portfolio to such a product,” says Gaurav Garg, Head of Research, CapitalVia Global Research.

With economic growth expected to rebound taking a sharp hit from coronavirus, some investors have been willing to consider riskier assets. Analysts hope this sentiment could prompt investors to consider the IIFL finance offering.

“The company is backed by strong set of foreign investors. The double digit coupon rate on offer is higher than normal and it offers scope for capital appreciation to investors, as normalcy comes back in the NBFC space,” says Ajay Manglunia, Head (Institutional Fixed Income), JM Financial.