Saturday, August 31, 2013

Subscribe to HUDCO tax free bonds issue, says ICICIdirect

"HUDCO has come out with tranche II of the tax free bond issue after having collected Rs 2215 crore in tranche I in January 2013. The tranche II tax free bond carries an annualised coupon of 7.53%and 7.69% for retail investors for tenure of 10 years and 15 years, respectively. Interest received on the bond is fully exempt from income tax. The pre-tax yield on the bond for the highest tax bracket investors, therefore, works out to 10.89% and 11.13% for 10 years and 15 years, respectively, higher than 8.5-9% on bank fixed deposit and other stable fixed income instruments. CARE and IRRPL have assigned AA+ rating for the bond issue, which is a notch below the highest AAA rating. The rating signifies a low credit risk. HUDCO is a wholly owned government company conferred with a Mini Ratna status. Increased focus of the government on the infrastructure space, going forward, may further augment government support and focus in development of HUDCO. Also, the secured nature of the bond makes them less risky making it a good fixed income investment option.

Issue details: The Central Government in exercise of the powers conferred by Section 10(15)(iv)(h) of the Income Tax Act, 1961 authorises HUDCO to issue during FY12-13, tax free, secured, redeemable, non-convertible bonds up to Rs 5000 crore. In the current year, through tranche I company has collected Rs 2215 crore.

HUDCO tranche II tax free bond comes with a coupon rate of 7.53% and 7.69% for 10 years and 15 years, respectively, for a retail investor. It is the highest coupon rate among ongoing tax free bond issues, as it is rated AA+ a notch below AAA ratings of assigned to other bonds. However, there is no significant credit risk difference in the two ratings.

The coupon on the bond issued under the tax exempt clause is related to the prevailing government securities rates. The ceiling in the coupon rate for a AA rated issuer is fixed at 80 basis points (bps) below the reference G-sec rate for the retail investor and 100 bps lower for others. It may be noted that the differential rate for retail investors shall be applicable only to original allottees. In the event of sale/transfer by the original allottee of the bond, the subsequent allottee will get the rates of other investor's category. Hence, in order to get higher coupon it is advisable for a retail investor to subscribe to this new issue and hold till maturity," says research report.

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