IDFC tax-saving Infrastructure bonds - Review, Should one invest in it?, Tax Deduction of 20,000 Rs under section 80CCF, Lock in period, Interest Rate

IDFC tax-saving Infrastructure bonds - Review, Should one invest in it?, Tax Deduction of 20,000 Rs under section 80CCF, Lock in period, Interest Rate

The second infrastructure bond issue, giving a tax deduction of up to '20,000 under section 80CCF, this time by Infrastructure Development Finance Co. Ltd (IDFC) opens on 30 September.

IFCI Ltd launched the first such tax-saving infrastructure bond in early September. IDFC, a listed company, gives loans to infrastructure projects. Though the government of India is its single-largest shareholder, it has a diversified list of shareholders.

The bond has four investment options. All the options have lock-in of five years and tenor of 10 years. After five years, options 1 and 2 allow you to liquidate on the stock exchanges and options 3 and 4 allow buy-back. To compensate for lack of buy-back, options 1 and 2 offer a slightly higher annual interest rate of 8%. Options 3 and 4 give 7.5%.

"As per rules, the interest rates should be in line with a government security of a similar maturity," said Rajiv Lall, chief executive officer, IDFC, at a press conference.

Since the bond offers tax deduction, the yield is higher than the actual rate offered. For instance, an individual in the highest tax bracket (30.90%) would earn between 12.07% and 15.75%.

Investors in the 20.60% bracket can earn 10.53% to 14.91% across all the four options.

IDFC bonds have got a credit of "LAAA" indicating that the instrument "carries the lowest credit risk". Not only is its credit rating higher than the IFCI bond, it comes from a rating agency (Icra) that offers us more comfort than Brickwork Ratings India Pvt. Ltd, a relatively new rating agency launched in 2008 that rated IFCI.

Compared with that, Crisil Ltd is 23 years old, Icra Ltd is around 20 years old and CARE about 17 years old.

It pays if a firm's higher credit rating is backed by a strong balance sheet. We checked out the firm's debt-equity ratio, which shows the extent of its borrowing (debt) for every unit of equity (a company's capital; its own money) it has. At present, the debt-equity ratio is 2.5 times; after the issue it will rise to 2.8.

"Typically a debt-equity ratio for a lending company is much higher than this. IDFC raised its equity capital recently through a qualified institutional placement route," says a debt fund manager with a domestic fund house who did not want to be identified. Most mutual fund houses prohibit their fund managers to speak on individual companies.

We also checked out the firm's non-performing assets (NPA) ratio. Expressed in percentage terms, this is the proportion of a company's loans that have gone bad or those it can't recover out of the total loans disbursed. As per the offer document, IDFC's NPA for the year ended 31 March was 0.17%. As per the quarter ended June, its NPA was 0.15%, down from 0.21% for the same period, a year back. A low NPA figure is good as it indicates that a significant portion of its loans can be recovered.

IDFC bond is not akin to a typical assured return instrument, but its financials inspire confidence. Also, these IDFC bonds are secured instruments.

The IDFC bond issue looks good. A rate of 8% bodes well over 10 years, especially if you need to park up to '20,000. Go for the buy-back option if your time horizon is five years, else the 10-year option is decent.

Remember, IDFC aims to raise up to '3,400 crore by March 2011 in tranches. "It's possible that future tranches could fetch you a slightly higher interest rate as experts believe that long-term interest rates may not fall before January 2011," said a fund manager. Also, debt market experts do not expect long-term interest rates to fall before the next calendar quarter begins.