Do STFC Bond yields justify the premium?

Shriram Transport Finance Co. Ltd. (STFC) is a NBFC providing finance for commercial vehicles. Its Bonds and stock are listed on NSE and BSE (NSE:SRTRANSFIN). One of its bond tranches Y3, par value Rs. 1,000, 10.75% coupon is trading at Rs. 1,120 on NSE. The yield works out to 9.59% as against the bond premium of 12%. So, does a 9.59% yield justify a 12% premium. Atleast in case of STFC it does not.

One of the main reasons is the deteriorating liquidity and profitability. The net working capital which was Rs. 21,263 crores in 2008-09 has declined to a negative Rs. 259 crores. Simultaneously the current ratio has declined from 9.48 to 0.99. Cash and bank balance as a percent of current assets has declined from 23.9% in 2008-09 to 10.2% in 2015-16.

Declining Liquidity

Meanwhile, provisions and write offs as a percent of Advances have increased from 1.66% to 3.23% . All this has affected the net profit which has declined to 11.47% in 2015-16.

 

Increased Provisions and Reduced Net Profit

Bond premiums can be quick to disappear. For instance, the series Y3 bonds trading at Rs. 1,200 on 16^th September are now trading at Rs. 1,120. A loss of almost 6.67% in one and half months or 53% on an annual basis. 

A second important reason is the market illiquidity of STFC Bonds. For instance, the Y3 tranch was traded on only one out of three trading days with total trading of Rs. 50.47 lakhs in the last three months being 0.867% of the bond value outstanding of Rs. 58.22 crores.

Imagine an investor wanting to liquidate his holding of Rs. 5 lakh bonds. To offload these in the market would entail significant costs and time during which his holdings value can get significantly eroded. The only option remaining with the investor would be to hold the bonds till maturity and bear the exposure to deteriorating financial conditions. With the bonds maturing in Oct 2020, it certainly does not seem a viable option.

Investors reaching out for yield would do well to keep the financials and liquidity in mind.