L&T Finance's NCD offer: Should you invest?

[Bonanza Portfolio Ltd]

L&T Finance's NCD offer: Should you invest?
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LARSEN & Toubro Finance has opened its first-ever public offer of 50 lakh
Secured Redeemable Non-Convertible Debentures (NCDs) of the face-value of
Rs 1,000 each.

About the issue
1. The issue is open from August 18, 2009 to September 4, 2009.
2. It offers a coupon rate of 9.5 per cent to 10.50 per cent depending on
the period chosen.
3. The minimum amount you can invest is Rs 10,000 for retail investors,
ie, 10 applications of Rs 1,000 each.
4. The interest earned will be fully taxed as per your tax slab.
5. The debentures are offered in four options: quarterly, semi-annual,
cumulative, and semi-annual with 120 months redemption period.

Four investment options:

Options

I

II

III

IV

Interest payment

Quarterly

Semi-annual

Cumulative

Semi-annual

Minimum Application

Rs 10,000

Rs 10,000

Rs 10,000

Rs 10,000

Face value of NCDs

Rs 1,000

Rs 1,000

Rs 1,000

Rs 1,000

Coupon

9.51 %

9.62 %

9.95 %

10.24 %

Yield on redemption

9.85 %

9.85%

9.95 %

10.50 %

Redemption date

60 months from
date of allotment

60 months from
date of allotment

88 months from
date of allotment

120 months from
date of allotment

Senior citizens, who are 65 or more years of age, at any time during the
financial year 2009-10, enjoy the special privilege to submit a self
declaration in the prescribed Form 15H for non-deduction of tax at source
in accordance with the provisions of section 197A (1C) of the IT Act even
if the aggregate income credited or paid or likely to be credited or paid
does not exceed the maximum amount not chargeable to tax; ie, Rs. 225,000
for FY 2008-09 (proposed Rs. 240,000 from FY 2009-10).

Also check: Bank fixed deposit rates

Should you invest?
Investment advisor, Sandeep Shanbhag says, Its a good bet to subscribe
to it. Since its a NCD issue, its got fixed interest, which means there
is not going to be any variability in the rate of interest. However, the
interest earned is fully taxable. Those who are looking for alternative
instruments besides bank fixed deposits (FDs) and company fixed deposits,
can subscribe to it. It gives better returns than bank FDs.

Echoing Shanbhag's thoughts, certified financial planner Kartik Jhaveri
says, Nothing wrong in subscribing to L&T. Cupon rate of 9.5 per cent
for 5 yrs and 10.5 per cent for 10 yrs. It's got a good rating: AA+. The
company is also reputed. So, there's no principal risk in subscribing to
the issue."

Dilemma: Should I subscribe or should I put my money into a FD?
1. Higher interest on NCD
Your fixed deposits and company fixed deposits will give you much lesser
yield than L&T issue. For a period of 5 years, say, State Bank of India
or ICICI Bank will give you 7.5 per cent to 8 per cent per annum on
deposits. L&T Finance's NCD offers you an interest rate of 9.5 per cent
per annum.

2. Safety at par
Shanbhag says, L&T has a very good pedigree and thats what matters. A
company with a pedigree like that and sustainability shouldnt be the
cause of worry for you. Also, NCD is secured borrowings for the company.
That is, if the company were to wind up, NCD holders will rank above all
unsecured creditors and other investors.

Conclusion
Like all debt investments, subscribe to this issue, if you are looking to
conserve and protect your money and make a slightly higher return than
bank deposits. If your goal is to create wealth, a strict NO.

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Please do revert if you find this worthy of further discussion.A C Lunkar
- ManagerBonanza Portfolio Ltd, Cama Estate, opp Future studio, Goregaon
east, Mumbai-400063bonanza.portfolio1@...

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