Ivm EndTermReport Group7 ABC1

8/11/2019 Ivm EndTermReport Group7 ABC1

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Investment Management Project

On

Fundamental Analysis of bond of SREI Infrastructure

Finance May 2014 NCD Public Issue and preparing Debt

Research report from an investor’s perspective.

Submitted to

Dr. D. N. Panigrahi

By

Group – 7

Section- ABC1

Meet Sabarwal (2013149)

Jatin Agarwal (2013123)

Mrigang Saurabh Dwivedi (2013158)

Navya Mukhi (2013162)

Hitesh Girotra (2013119)



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TITLE OF THE PROJECT

Fundamental Analysis of bond of SREI Infrastructure Finance May 2014 NCD Public Issue

and preparing Debt Research report from an investor’s perspective.

BRIEF INTRODUCTION TO THE PROJECT

The objective of our project is to demonstrate our knowledge of the principles of

fundamental analysis of bonds.

To show how financial and investment analysis techniques may be used to develop an

appropriate investment strategy.

To do the credit rating from the perspective of lender or a credit rating agency by

following the rating methodology adopted by credit rating agencies.

METHODOLOGY AND PLANNING OF WORK

SREI Infrastructure Finance Limited deals in Non-convertible, secured and redeemable

debentures. Thus our study will be focused on analysis of few major factors affecting credit

rating which are as follows –

Industry analysis

SREI’s ability to pay its debt. It is the most important component of any company’s

credit rating. In this, we will calculate the cash flows and compare it with fixed

interest obligations of the company

Outstanding debt of the company.

Earning capacity of the company.

Interest coverage ratio.

ICR = EBIDTA / Net Interest Expenses

Ratio of current assets to current liability, i.e., CR.

CR = CA / CL

Value of assets pledged by the company.

Types of credit in use

Market position of the company.

Capacity utilization, operational efficiency etc.

Track record of promoters, directors and expertise of staff as this also creates some

impact on company’s credit rating.

On the basis of the findings of the above given ratios and financial analysis, we’ll prepare

a credit rating for SREI Infrastructure Finance Limited on the basis of which investors

can know about the financial strength of the issuing company, returns expected and risk

attached. Such rating is also very much beneficial for the company as it becomes



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convenient for the company to raise resources, cost reduction, builds up company’s image

and facilitates growth.

Industry analysis

Discussion on Indian corporate bond market has been going on for ages and in each and

every forum, the need for developing the corporate bond market as an alternative funding

arrangement is well understood and acknowledged. Both Government and Securities

Exchange Board of India (SEBI) have set up many Groups, Committees, and Forums to study

and discuss the issue for finding out a workable solution. The Dr. R H Patil Committee report

(2005) presented a reasonable solution and roadmap for kick-starting this form of the market

to fulfill the future need of the Industry in funding investment.

Almost 7 years have passed after the report was made public, not much headway has been

achieved. Some of the issues like unification of stamp duties on creating charges forsecuritized debt have been contentious issues and no solution has been found to take this

market to the place where it belongs.

Unlike other countries, a large chunk of corporate funding In India is done through banking,

retained earnings and capital through equity offerings. Corporate bonds contribute fairly little

in terms of long term funding. Most of the studies on Indian bond market centered on issues

pertaining to the market microstructure issues and other bottlenecks in the market specifically

cost related ones.

Meaning and Definition

Credit rating is the opinion of the rating agency on the relative ability and willingness of tile

issuer of a debt instrument to meet the debt service obligations as and when they arise. Rating

is usually expressed in alphabetical or alphanumeric symbols. Symbols are simple and easily

understood tool which help the investor to differentiate between debt instruments on the basis

of their underlying credit quality. Rating companies also publish explanations for their

symbols used as well as the rationale for the ratings assigned by them, to facilitate deeper

understanding.

In other words, the rating is an opinion on the future ability and legal obligation of the issuer

to make timely payments of principal and interest on a specific fixed income security. The

rating measures the probability that the issuer will default on the security over its life, which

depending on the instrument may be a matter of days to thirty years or more. In fact, the

credit rating is a symbolic indicator of the current opinion of the relative capability of the

issuer to service its debt obligation in a timely fashion, with specific reference to the



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instrument being rated. It can also be defined as an expression, through use of symbols, of the

opinion about credit quality of the issuer of security/instrument.

Importance of Credit Rating

Credit ratings establish a link between risk and return. They thus provide a yardstick against

which to measure the risk inherent in any instrument. An investor uses the ratings to assess

the risk level and compares the offered rate of return with his expected rate of return (for the

particular level of risk) to optimise his risk-return trade-off. The risk perception of a common

investor, in the absence of a credit rating system, largely depends on his familiarity with the

names of the promoters or the collaborators. It is not feasible for the corporate issuer of a debt

instrument to offer every prospective investor the opportunity to undertake a detailed risk

evaluation. It is very uncommon for different classes of investors to arrive at some uniform

conclusion as to the relative quality of the instrument. Moreover they do not possess the

requisite skills of credit evaluation.

Indications of the Assigned Ratings

Rating symbols assigned to a security issue is an indicator of the following:

i. the nature and terms of the particular security being issued;

ii.

the ability and the willingness of the issuer of a security to make payments in time;

iii. the probability that the issuer will make a default in payments;

iv. the degree of protection available to the investors if the security issuer company is

liquidated re-organised or declared bankrupt.

Factors Affecting Assigned Ratings

The following factors generally influence the ratings to be assigned by a credit rating agency:

i. The security issuer’s ability to service its debt. In order, they calculate the past and

likely future cash flows and compare with fixed interest obligations of the issuer.

ii. The volume and composition of outstanding debt.

iii. The stability of the future cash flows and earning capacity of company.

iv. The interest coverage ratio i.e. how many number of times the issuer is able to meet

its fixed interest obligations.

v. Ratio of current assets to current liabilities (i.e. current ratio (CR)) is calculated to

assess the liquidity position of the issuing firm.



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vi. The value of assets pledged as collateral security and the security’s priority of claim

against the issuing firm’s assets.

vii. Market position of the company products is judged by the demand for the products,

competitor’s market share, distribution channels etc.

viii. Operational efficiency is judged by capacity utilisation, prospects of expansion,

modernisation and diversification, availability of raw material etc.

ix. Track record of promoters, directors and expertise of staff also affect the rating of a

company.

Benefits to Investors

Safety of investments. Credit rating gives an idea in advance to the investors about

the degree of financial strength of the issuer company. Based on rating he decides

about the investment. Highly rated issues give an assurance to the investors of safety

of Investments and minimize his risk.

Recognition of risk and returns. Credit rating symbols indicate both the returns

expected and the risk attached to a particular issue. It becomes easier for the investor

to understand the worth of the issuer company just by looking at the symbol because

the issue is backed by the financial strength of the company.

Freedom of investment decisions. Investors need not seek advice from the stock

brokers, merchant bankers or the portfolio managers before making investments.

Investors today are free and independent to take investment decisions themselves.

They base their decisions on rating symbols attached to a particular security. Each

rating symbol assigned to a particular investment suggests the creditworthiness of the

investment and indicates the degree of risk involved in it.

Wider choice of investments. As it is mandatory to rate debt obligations for every

issuer company, at any particular time, wide range of credit rated instruments are

available for making investment. Depending upon his own ability to bear risk, the

investor can make choice of the securities in which investment is to be made.

Dependable credibility of issuer. Absence of any link between the rater and rated

firm ensures dependable credibility of issuer and attracts investors. As rating agency

has no vested interest in issue to be rated, and has no business connections or links

with the Board of Directors. In other words, it operates independent of the issuer

company; the rating given by it is always accepted by the investors.



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Easy understanding of investment proposals. Investors require no analytical

knowledge on their part about the issuer company. Depending upon rating symbols

assigned by the rating agencies they can proceed with decisions to make investment in

any particular rated security of a company.

Relief from botheration to know company. Credit agencies relieve investors from

botheration of knowing the details of the company, its history, nature of business,

financial position, liquidity and profitability position, composition of management

staff and Board of Directors etc. Credit rating by professional and specialized analysts

reposes confidence in investors to rely upon the credit symbols for taking investment

decisions.

Advantages of continuous monitoring. Credit rating agencies not only assign rating

symbols but also continuously monitor them. The Rating agency downgrades or

upgrades the rating symbols following the decline or improvement in the financial

position respectively.

Credit Rating of Srei Infrastructure Finance Ltd

Now based on the understanding from the above theoretical concepts, we will try to apply the

rating methodology and will try to do the credit rating.

Background

SREI Infrastructure Finance Limited has been a pioneer in infrastructure financing in India,

steadily contributing towards infrastructural development, and a better tomorrow. Today, we

are synonymous with innovative infrastructure financing from customized solutions to

marketing programmes.

In over 25 years of operation, they have empowered more than 30,000 entrepreneurs through

our bouquet of services in the infrastructure sector: Infrastructure Project Finance, Advisory

and Development, Infrastructure Equipment Finance, Alternative Investment Funds, Capital

Market and Insurance Broking.

SREI has led from the forefront in almost all stages of the infrastructure value chain. They

are amongst the first Indian NBFCs to access the international market for funds; the first



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Indian infrastructure NBFC to be listed on the London Stock Exchange; and the first

company to lay the ground for passive telecom infrastructure in India.

They are also the first to break new ground in rural IT infrastructure in India, under the

National e-Governance Plan of the Government of India. This mega project, called SAHAJ e-

Village, envisages creating over 28,000 Common Service Centers (CSCs) in six states,

offering B2B, B2C, G2C and e-Learning services to a 30 crore rural population.

To broad base shareholding, SREI was listed on the London Stock Exchange (LSE) way back

in 2005. Besides, they have the distinction of international institutions as our stakeholders,

including IFC (International Finance Corporation - World Bank Group), KfW & DEG

Germany (Financial Institutions owned by the Government of Germany), FMO (Financial

Institution owned by the Government of Netherlands), BIO (Financial Institution owned by

the Government of Belgium) and FINFUND (Financial Institution owned by the Government

of Finland).

With a customer base of over 30,000 and over 34,070 crore of Consolidated Assets under

Management, SREI has a pan-India presence with a network of 99 offices. They share a

strong partnership with the Tata Group through Viom Networks Limited for shared passive

telecom infrastructure and BNP Paribas for Equipment Financing. We are also increasing our

presence overseas and currently operate two offices in the Russian Federation. Our

competitive edge and the ability to provide all possible infrastructure related services under

one roof, makes us the most preferred partner for infrastructure players in India.

Credit Risk Assessment

Prospects

Prospects of the company remain dependent on performance of the domestic economy mainly

infrastructure related sectors where SIFL has significant exposure. The company’s ability to

contain incremental NPAs and improve its profitability, as also its ability to gradually

monetize its strategic investments remains the key rating factors.

Experienced promoter with established track record



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Long track record of operation in construction equipment financing, existing client

relationships in infrastructure business and market knowledge of the promoters has helped the

company in managing the relatively new infrastructure portfolio.

Both the promoters, Shri Hemant Kanoria (CMD) and his brother Shri Sunil Kanoria (Vice

Chairman) have over three decades of business experience in the financial sector.

Charges on the company

The following table depicts the debt on the company.

S.No.

Charge

ID

Date of Charge

Creation/Modification

Charge amount

secured Charge Holder

Service

Request

Number(SRN)

1 10516636 06-08-2014 1,000,000,000.00 Vijaya Bank C18093880

2 10516207 05-08-2014 5000,00,000.00THE KARUR VYSYA BANKLIMITED

C17601105

3 10513221 27-06-2014 4500,00,000.00 Axis Trustee Services Limited C12321774

4 10510296 25-06-2014 1,400,000,000.00 State Bank of India C12261228

5 10502642 28-05-2014 1,500,000,000.00 Axis Trustee Services Limited C06368021

6 10494038 08-05-2014 1,000,000,000.00 ICICI BANK LIMITED C04426409

Continuing growth in advances

SIFL’s loan portfolio (including operating lease assets) grew by 12.5% y-o-y to touch

Rs.11,316.9 crore as on March 31, 2014 as against Rs.10,061 crore as on March 31, 2013,

despite its disbursements remaining flat in FY14 at Rs.4,706 crore as against Rs.4,717 crore

in FY13. SIFL’s major focus areas continue to be power, road, urban infrastructure, telecom,

and SEZ & industrial park.



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Diversified resource mix

SIFL has a well-diversified borrowing mix. Around 25% of its total borrowings as on

Mar.31, 2014 were in the form of term loans (from domestic banks, financial institutions and

foreign institutions), which are typically of longer tenure. Working capital borrowings &

short term loans comprised about 52% and 1% of the total borrowing respectively, as on

Mar.31, 2014. The balance borrowings were in the form of debentures and other sources like

mezzanine capital (about 22%).

Satisfactory gearing with adequate capitalization

Though overall gearing deteriorated in line with increase in business volume and source ofavailability of higher debts to fund the same, overall gearing ratio continued to remain

satisfactory at 4.84 as on Mar.31, 2014 (vis-à-vis 4.22 as on Mar.31, 2013). Furthermore,

overall CAR of SIFL declined 17.78% as on March 31, 2014 from 21.67% as on March 31,

2013, however the same continued to remain well above the regulatory benchmark (15%).

Portfolio concentration risk

SIFL’s clients mainly belong to infrastructure related sectors. Due to nature and requirement

of the infrastructure space, their ticket sizes are relatively large. Accordingly, concentration

risk remains high for the company.

Moderate asset quality

Gross and net NPA ratios remained at 3.53% and 3.09% respectively as on Mar. 31, 2014 as

against 3.60% and 3.26% as on Mar.31, 2013 respectively, on account of only marginal fresh

slippages coupled with increase in advance portfolio. Majority of the advances of SIFL have

been extended to companies in the infrastructure sector which currently remain affected on

account of the challenging operating environment. Further, the restructured assets outstanding

as on Mar.31, 2014 stood low at only Rs.22.5 crore.

Moderate financial performance

SIFL’s total income grew by 8.4% in FY14 over FY13 to reach Rs.1 , 805.9 crore. Its interestincome grew by 13.3% in FY14 over FY13 and the same was almost similar to the growth in



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interest expense, which grew by 14.3% in FY14 over FY13. Accordingly, Net Interest

Margin, which stood at 1.41% in FY14, also remained at similar levels to that of FY13

(1.52%). However, ROTA- after MTM loss/gain declined to 0.44% in FY14 as compared to

0.82% in FY13 on account of decline in other income.

Financial Performance:

Solvency Ratios

Solvency ratio is used to measure an enterprise’s ability to meet its debt and other

obligations. The solvency ratio indicates whether a company’s cash flow is sufficient to meet

its short-term and long-term liabilities. Lower the company's solvency ratio, the greater the

probability that it will default on its debt obligations.

Debt to equity ratio

This ratio indicates the degree of financial leverage being used by the business and includes

both short-term and long-term debt. A rising debt-to-equity ratio implies higher interest

expenses, and beyond a certain point it may affect a company’s credit rating, making it more

expensive to raise more debt.

A ratio of 1 or 1: 1 means that creditors and stockholders equally contribute to the assets of

the business. A less than 1 ratio indicates that the portion of assets provided by stockholders

is greater than the portion of assets provided by creditors and a greater than 1 ratio indicates

0 1 2 3 4 5 6

2014

2013

2012

2011

2010

Debt Equity Ratio

Debt Equity Ratio

http://www.investopedia.com/terms/d/dfl.asp

http://www.investopedia.com/terms/i/interestexpense.asp





http://www.investopedia.com/terms/d/dfl.asp





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This ratio measures the company’s ability to meet the interest expense on its debt with

its operating income, which is equivalent to its earnings before interest and taxes (EBIT). The

higher the ratio, the better the company’s ability to cover its interest expense. A ratio used to

determine how easily a company can pay interest on outstanding debt

A ratio under 1 means that the company is having problems generating enough cash flow to

pay its interest expenses. Ideally you want the ratio to be over 1.5.

A high coverage ratio may suggest a company is "too safe" and is neglecting opportunities to

magnify earnings through leverage.

Moderate asset-liability maturity profile

Liquidity position of SIFL was satisfactory as on Mar.31, 2014, with positive mismatches in

the short term time buckets.

Liquidity Ratios

Current ratio

0 0.5 1 1.5 2

2014

2013

2012

2011

2010

Interest Cover

Interest Cover

http://www.investopedia.com/terms/o/operatingincome.asp

http://www.investinganswers.com/financial-dictionary/ratio-analysis/coverage-ratio-1042

http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/earnings-1514

http://www.investinganswers.com/financial-dictionary/debt-bankruptcy/leverage-61

http://www.investinganswers.com/financial-dictionary/debt-bankruptcy/leverage-61

http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/earnings-1514

http://www.investinganswers.com/financial-dictionary/ratio-analysis/coverage-ratio-1042

http://www.investopedia.com/terms/o/operatingincome.asp



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Current ratio (also known as working capital ratio) is a popular tool to evaluate short-term

solvency position of a business. Short-term solvency refers to the ability of a business to pay

its short-term obligations when they become due. Short term obligations (also known as

current liabilities) are the liabilities payable within a short period of time, usually one year.

Current ratio is a useful test of the short-term-debt paying ability of any business. A ratio of

2:1 or higher is considered satisfactory for most of the companies but analyst should be very

careful while interpreting it. A company with high current ratio may not always be able to

pay its current liabilities as they become due if a large portion of its current assets consists of

slow moving or obsolete inventories. On the other hand, a company with low current ratio

may be able to pay its current obligations as they become due if a large portion of its current

assets consists of highly liquid assets i.e., cash, bank balance, marketable securities and fast

moving inventories.

Quick Ratio

0 0.5 1 1.5 2 2.5

2014

2013

2012

2011

2010

Current Ratio

Current Ratio



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It is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s

ability to meet its short-term obligations with its most liquid assets. Higher the quick ratio of

the company, better the company's liquidity position. It is also known as the “acid-test ratio"

or "quick assets ratio."

Profitability Ratios

Return on capital employed

Return on capital employed (ROCE) is the ratio of net operating profit of a company to its

capital employed. It measures the profitability of a company by expressing its operating profit

0 5 10 15 20 25 30 35

2014

2013

2012

2011

2010

Quick Ratio

Quick Ratio

0 5 10 15

2014

2013

2012

2011

2010

Return On Capital Employed(%)

Return On Capital

Employed(%)



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as a percentage of its capital employed. Capital employed is the sum of stockholders' equity

and long-term finance.

A higher value of return on capital employed is favorable indicating that the company

generates more earnings per dollar of capital employed. A lower value of ROCE indicates

lower profitability. A company having less assets but same profit as its competitors will have

higher value of return on capital employed and thus higher profitability.

Return on net worth

Return on net worth is also known as Return on Equity. Return on Net worth is an indicator

of company's profitability by measuring how much profit the company generates with the

money invested by common stock owners. The return on net worth ratio is a profitability ratio

that measures the ability of a firm to generate profits from its shareholders investments in the

company. In other words, the return on equity ratio shows how much profit each dollar of

common stockholders' equity generates.

Investors want to see a high return on equity ratio because this indicates that the company is

using its investors' funds effectively. Higher ratios are almost always better than lower ratios,

but have to be compared to other companies' ratios in the industry.

0 5 10 15

2014

2013

2012

2011

2010

Return On Net Worth(%)

Return On Net Worth(%)



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Conclusion

So, the NCDs of Srei Infrastructure Finance Ltd have been rated ‘CARE AA- (Double a

Minus)’ by Credit Analysis &Research Limited (“CARE”). Instruments with this rating are

considered to have high degree of safety regarding timely servicing of financial obligations.Such instruments carry very low credit risk .

As per our study we have estimated it as a profitable issue but with fewer risks associated to

it as infrastructure market is really volatile. So as a lender we will invest only if we have a

diversified portfolio of investments.



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Bibliography

http://www.srei.com

www.wikkiepedia.com

http://www.moneycontrol.com

http://www.careratings.com

http://www.investopedia.com

http://www.investopedia.com

Also following are the ways through which the data is be collected:

Prowess

Capital line

Bloomberg

http://www.srei.com/


http://www.wikkiepedia.com/


http://www.moneycontrol.com/


http://www.careratings.com/


http://www.investopedia.com/












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