About IDFC's tax saving infrastructure bonds

The bonds would be issued in the form of redeemable non-convertible debentures and would be secured with the receivables and immovable properties of the company. The proceeds from the issue will be mainly used for growing its infrastructure financing business. The company also plans to use a part of the profits generated from the funds to develop the research and policy advisory functions of the government and to train civil servants in managing public private partnership (PPP) infrastructure operations.

Business
Set up in 1997, the company has primarily focused on infrastructure project finance. The company later entered into alternative asset management businesses such as private equity. In FY08, the company entered the asset management business by acquiring this business of Standard Chartered Bank in India. Being an IFC now, the company can access long-term funds to fuel its expansion plans. Moreover, this move also allows the company to obtain more bank financing and increased access to overseas funds.

Infrastructure Development Finance Company (IDFC) is coming out with an infrastructure bond to raise capital to fund its growth plans. The company plans to triple its balance sheet in the next 3-4 years. The move comes on the back of IDFC being accorded the status of infrastructure finance company (IFC). As per the current norms, IFCs can raise long-term funds up to 25% of their gross disbursements in FY10.

Financials
On a consolidated basis, IDFC recorded a 31% compounded annual growth rate (CAGR) in its total income in the past five years. Total income for FY10 stood at Rs 4,060.2 crore. While most companies reported moderate growth in their top lines in FY09 on the back of global crisis, IDFC reported a high growth of 27% in its total income. Last year, IDFC saw a 73% hike in its employee costs.

The surge was on account of increased hiring on the back of an improving economic scenario. Even after this surge, the overall expenditure rose by a negligible amount. This was mainly because of a reduction in interest costs as well as a decrease in general operating expense of the company. The increased focus on operational efficiency has boosted the company’s bottom line. Net profit at the end of FY10 stood at Rs 1,053.7 crore, up by about 41% from the year-ago period.

In fact, the company has recorded an average 29% growth in net profit each year since FY06. Moreover, the company is adequately capitalized with its capital adequacy ratio being 26% vis-à-vis the 15% minimum required for an IFC. A strong capital base indicates that the company has been efficiently managing the liquidity risk and it intends to scale up the operations.

Returns on Investment
The company is issuing the bond in four different series (see table). However, only two of them have a buyback option. With the buyback option, bondholders could either redeem the funds from the company or sell the bonds on the stock exchange, as the bonds would be listed after a lock-in period of 5 years. The bond seems to be giving a yield of around 8% or 7.5% as per the series chosen.

However, the bond also has the advantage of tax exemption. This will increase the benefit to investors as there would be savings in various income tax brackets.

As such, the yield on investment could go as high as 17.2% (in the highest tax bracket of 30.9%). Compared to other fixed income instruments, such as bank fixed deposits which give a return of around 7.5-8%, the tax adjusted yield of the bond are much higher.

To add to this, a portfolio with both fixed income and equity investments provides an investor with higher diversification benefits thereby offering higher returns for the same level of risk. Investors with a long-term perspective could consider this investment opportunity.

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