Building on infrastructure growth

Long term infrastructure bonds fall under Section 80 CCF of the Income Tax Act, 1961. Investments in such bonds entitle an investor to a deduction of up to Rs 20000 from the gross total income over and above the limit of Rs 1 lakh available under Section 80C. The bonds will be available for a minimum tenure of 10 years, and will have a lock-in period of five years. Only Resident Individuals (Major) and HUFs can invest in these bonds. However, one should note that the interest earned on these bonds is taxable.

Companies like L&T Infrastructure Finance and SREI Infrastructure Finance have tapped the market to raise funds through the long term infrastructure bond route earlier too. Now, L&T is tapping this route for the second time in this financial year, while SREI is raising money for the first time in FY12.

L&T Infra has plans of mobilising Rs 1100 crore in FY12 by issuing infra bonds. In the first tranche, L&T had mobilised approximately Rs 530 crore. Of this, approximately 71 per cent of the subscription was for the second option, i.e. cumulative interest payment. This tells us that investors are confident about the company’s fundamentals and will take up the entire amount (Principal + Interest) at the time of maturity or at the time of a buyback.

With interest rates softening, the company is offering a coupon rate of 8.70 per cent this time, which is lower by 30 basis points with respect to the earlier issue. The other aspects of the bond are similar to the tranche 1 issue. It has two options, one with interest paid annually, while the other offers cumulative interest payment. Both options have a tenure of 10 years. The bond has a buyback option at the end of the fifth and seventh years. The minimum application amount is Rs 5000 (i.e. five bonds of Rs 1000 each), beyond which investors can apply in multiples of one bond (Rs 1000). The issue opened on 10th January, 2012, and will close on 11th February, 2012.
   
SREI Infrastructure Finance is also tapping the market through long term infrastructure bonds to raise funds up to Rs 300 crore. The minimum application amount is Rs 1000 (i.e. one bond of Rs 1000), and investors can apply in multiples of one bond thereafter. The issue opened on 31st December, 2011, and will close on 31st January, 2012.[PAGE BREAK]

Investors have four options available to them. The first and the second are for a tenure of 10 years each, with a coupon rate of 8.90 per cent. The third and fourth options are for a tenure of 15 years each, with a coupon rate of 9.15 per cent. In the case of the first and third options, interest will be paid annually, while the second and fourth options offer cumulative interest payment. The company also has a buyback option at the end of five years. The bond will be listed on the Bombay Stock Exchange (BSE).

Investment in either of the companies would be considered good. L&T’s coupon rate is lower than that of SREI. The coupon rate of 9.15 per cent for a 15-year period is really attractive for investors. However, L&T has an edge over SREI when it comes to fundamentals and the management of the company. One should also note that L&T is offering a buy back option in the seventh year, which is not offered by SREI.

The interest rate on infrastructure bonds is based on long term government bonds. With the softening of the yield on government securities, we believe that going forward companies would most probably come up with coupon rates that will be lower than or similar to what these companies are offering now. Nevertheless, those who have missed the earlier opportunities should invest in these bonds now to avoid last minute tax planning.

We hold that opting for the annual interest payment option and the buyback option at the end of the fifth year (for either of the companies), will help investors to achieve the best possible returns.

The following is the table of various options that are available to investors for the L&T and SREI infra bonds

	SREI Infrastructure Finance
Particulars	Option I	Option II	Option III	Option IV
Minimum Application	Rs 1000 (i.e. 1 Bonds)
Horizon	10 Years		15 Years
Coupon Rate (%)	8.90 p.a.	8.90 p.a. compounded annually	9.15 p.a.	9.15 p.a. compounded annually
Interest Payment	Annual	Cumulative	Annual	Cumulative
Maturity Amount	Rs 5000*	Rs 11733.65*	Rs 5000*	Rs 18592*
Buyback Option	At the end of 5th year
Buyback Amount at the end of the 5th year	Rs 5000*	Rs 7657.90*	Rs 5000*	Rs 7746.20*
Buy back Amount at the end of 7 th year	NA
Lock in Period	5 Years from the deemed date of allotment
Tax Rate (%)	Effective Yield - Pre-tax if invested till maturity, and at the time of buyback (5th year)
10.3	10.62 and (11.74)	10.09 and (11.29)	10.55 and (12.01)	9.94 and (11.55)
20.6	12.64 and (15.05)	11.45 and (14.04)	12.21 and (15.35)	10.84 and (14.30)
30.9	15.07 and (19.01)	13.01 and (17.26)	14.24 and (19.33)	11.87 and (17.52)
* Assuming amount Invested is Rs 5000

	L&T Infrastructure Finance
Particulars	Option I	Option II
Minimum Application	Rs 5,000 (i.e. 5 Bonds)
Horizon	10 Years
Coupon Rate (%)	8.70 p.a.	8.70 compounded annually
Interest Payment	Annual	Cumulative
Maturity Amount	Rs 5000*	Rs 11515.05*
Buyback Option	At the end of 5th year & 7th year
Buyback Amount at the end of the 5th year	Rs 5000*	Rs 7587.85*
Buy back Amount at the end of 7 th year	Rs 5000*	Rs 8965.55*
Lock in Period	5 Years from the deemed date of allotment
Tax Rate (%)	Effective Yield - Pre-tax if invested till maturity, (at the time of buyback 5th year) and at the time of 7th year**
10.3	10.41, (11.52), 10.88**	9.89, (11.09), 10.40**
20.6	12.41, (14.82), 13.42**	11.24, (13.83), 12.34**
30.9	14.81, (18.75), 16.45**	12.79, (17.04), 14.59**
* Assuming amount Invested is Rs 5000