Is It Worth Investing in Edelweiss Housing Finance Limited NCD?

Edelweiss Housing Finance Limited has launched its secured redeemable Non-Convertible Debentures (NCDs). The total size of the issue is Rs 300 crore, with the base issue of Rs 150 crore and an option to retain over-subscription (Greenshoe option) up to Rs 150 crore. A Greenshoe is an option used to issue additional bonds in case of high demand.

The issue opened for subscription on April 6 and closes on April 26, 2022. The allotment will be on a first-come, first-serve basis.

The Key Highlights of Edelweiss Housing Finance Limited NCD

Edelweiss Housing Finance Limited NCD offers investors an option to choose from the 10 series of NCDs carrying a fixed coupon and having tenure of 24 months, 36 months, 60 months, and 120 months with annual, monthly, and cumulative interest options. This means that an investor can choose the tenure and interest payout according to his/her financial needs.

The Coupon for NCDs, which is the interest rate, ranges from 8.50% to 9.70% per annum. This translates into an effective annual yield in the range of 8.49% to 9.70%.

All categories of investors in the proposed Issue who are also holders of NCD(s)/Bond(s) previously issued by the company, and/or ECL Finance Limited, Edelweiss Financial Services Limited, Edelweiss Retail Finance Limited, and Edelweiss Finance & Investments Limited as the case may be, and/or are equity shareholder(s) of Edelweiss Financial Services Limited as the case may be, on the Deemed Date of Allotment and applying in Series I, Series III, Series IV, Series VI, Series VII, Series IX and/or Series X shall be eligible for an additional incentive of 0.20% p.a.

Equirus Capital and Edelweiss Financial Services are the lead managers for the issue. The face value of each bond is Rs 1,000. The minimum application is available for 10 NCDs, i.e., Rs 10,000. Thereafter, you can invest in multiples of Rs 1,000. The NCDs proposed to be issued have been rated "CRISIL AA-/Negative" and "ACUITE AA/Negative".

You must have an Active DEMAT Account to get the allotment of the NCDs. Edelweiss Housing Finance Limited NCD is proposed to be listed on BSE. The NCDs shall be listed within 6 working days from the date of issue closure. BSE has been appointed as the Designated Stock Exchange.

About the Issuer - Edelweiss Housing Finance Limited

Edelweiss Housing Finance Limited ("EHFL") is a non-deposit-taking Housing Finance Company focused on offering secured loan products to suit the needs of the individuals, including small ticket unsecured loans to its customers, mainly in rural areas and corporates. It is a part of the Edelweiss group, which is one of the leading diversified financial services groups in India.

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Edelweiss Housing Finance Ltd. (EHFL) is a housing finance company registered with National Housing Bank (NHB) and was incorporated in FY2011 following the group's strategy of creating a larger retail footprint. The company offers home loans and loans against property. As on December 31, 2021, the company had assets of Rs 4,272 crore.

Home loans to individuals with security against the property account for the majority of the loan book. Notably, it accounts for around 60% of the loan book, with the remaining 35% coming from other sorts of loans such as home equity loans and 5% from construction loans.

The firm has a Pan-India presence and a strong brand on which to build future growth. Over the last 3- 4 years, they have managed to keep their average medium-term borrowing costs in the 9%-9.5% range. According to regulatory criteria, it is likewise a well-capitalized corporation.

EHFL reported a Profit After Tax (PAT) of Rs 3.73 crore on a total income of Rs 551 crore for the fiscal year 2021, against a profit of Rs 1.56 crore on a total income of Rs 607 crore for the fiscal year 2020. During the first nine months of the fiscal year 2022, EHFL reported a PAT of Rs 5.4 crore on a total income of Rs 392.6 crore.

The objective of the NCD issue

Edelweiss Housing Finance Limited will utilize the proceeds from the NCD for the purpose of onward lending, financing, and for repayment/ prepayment of interest and principal of existing borrowings of our Company (at least 75% of the amount raised).

The balance is proposed to be utilised for general corporate purposes, subject to such utilisation not exceeding 25% of the amount raised in the issue, in compliance with the SEBI NCS Regulations.

Tax Implications

Under 'income from other sources,' interest income from NCDs is taxed in the same way as fixed-income securities. When NCDs are sold within a year, the STCG is calculated based on the income tax slab rate. If the NCDs are sold after a year or before the maturity date, LTCG at 20% with indexation will apply.

Should you invest in Edelweiss Housing Finance Limited NCD?

When compared to your bank's Fixed Deposit, which delivers returns in the range of 6.10-6.50 %, the NCD offers a decent coupon rate. This NCD issue offers a good interest rate for investors wishing to boost their regular income through debt allocation at a time when bank fixed deposit rates are low. Since the maturities are spread out, you can pick the tenure that best suits your needs. The bonds will be listed, which means you get the option of an early exit if you choose to or need to.

However, NCDs carry the default risk, rating agency CRISIL has assigned Edelweiss Housing Finance Limited NCD AA-/Negative, and ACUITE rating & research limited has assigned AA rating with a Negative outlook. This implies a level of credit risk for investors.

According to the financial statements in the NCD prospectus, the company's balance sheet was weaker at the end of FY 21 than it was at the end of FY 20. Some of this may be a direct outcome of the pandemic's effects on the housing sector and the slow-paced economic growth. The pandemic had a significant influence on business negatively, and while part of it has recovered, it is still much below pre-pandemic levels.

Given that the company's financial health appears to be improving, any setbacks in the current inflationary environment, as well as geopolitical tensions resulting from the Russia-Ukraine conflict, could hamper economic growth and have an impact on the housing sector.

Notably, NCD issues do not have guaranteed payouts, so you must make your decision based on your judgement of the company's capacity to meet its financial obligations. Edelweiss Housing Finance Limited NCD currently has an AA-/negative outlook rating, which is not ideal. Despite the expectation of a revival in the housing sector, inherent business risks and the overall operational environment are not favourable at the moment.

Therefore, if you are willing to stomach high risk for slightly higher returns, you can invest a portion of your capital to enhance your overall fixed income returns. For the time being, given the uncertainty and risk in the prevailing environment, it's advisable to be prudent and prefer AAA rated NCDs, allocating only 5-10% of your overall fixed income portfolio allocation to them.

As a result, Edelweiss Housing Finance Limited NCD is suitable only for investors with a high-risk appetite and a good understanding of the credit market. Investors that value capital safety should give Edelweiss Housing Finance Limited NCD a miss.

Warm Regards,
Mitali Dhoke
Jr. Research Analyst