Attractive yield notwithstanding, penchant for lending to real estate developers for acquisition of land parcels is fraught with considerable risk.
|
JM FINANCIAL PRODUCTS OFFER AT A GLANCE |
|
| Metrics | Particulars |
| Issuer | JM Financial Products Ltd |
| Symbol | JMFPIV |
| Nature of the issue | Secured Redeemable Non-convertible Debenture |
| Sponsor Bank | ICICI Bank |
| Lead Manager | Equirius Capital Ltd, JM Financial Ltd |
| Debenture Trustee | IDBI Trusteeship Services Ltd |
| Rating Agency | ICRA and CRISIL |
| IPO Grading | ICRA AA/Stable and CRISIL AA/Stable |
| Issue size | 10,00,000 NCDs of Rs.1,000 each aggregating to Rs.100 cr, with an option to retain oversubscription of Rs.400cr, aggregating in all to Rs.500 cr |
| Issue Period | 23.09.2021 to 14.10.2021 |
| Market lot | 1 NCD |
| Issue Price | Rs.1,000 per NCD |
| Minimum Application size | 10 NCD |
| Tenor and Interest on each Series of NCDs | S1: 39 Months (91D TB+315 bps spread, payable annually); S2: 60 Months (8.20% payable annually); S3: 60 Months (7.91% payable monthly); S4: 100 months (8.30% payable annually) |
| Reservation for Retail Investors | 40% |
| Registrar | KFin Technologies |
JM Financial Products Ltd (JMFPL), promoted by one of the oldest investment bankers in the country, JM Financial Ltd (JFL), is making a public offer of Secured, Redeemable Non-convertible Debentures of Rs.1,000 each aggregating to Rs.100 cr, with an option to retain oversubscription to a further extent of Rs.400 cr, aggregating in all to Rs.500 cr.
The offer opened for subscription on September 23 and is scheduled to remain open upto October 14. The issuer has the option to close the issue earlier if it is oversubscribed earlier than the scheduled date of closure.
The offer is being lead managed by Equirus Capital and JFL itself, with the latter undertaking to restrict itself to marketing the issue.
JMFPL made a similar public offer of NCDs, in three tranches, in 2019-20 aggregating to Rs.640 cr. After a covid-induced lull in FY 2020-21, the company is now approaching the public with Tranche 1 of the issue, seeking to raise a maximum of Rs.500 cr. The company plans to make further tranches of NCDs during the current fiscal, taking the planned aggregate fund-raise to Rs.1,500 cr, including the current issue.
Till the close of business on 27th September 2021, the NCD issue has attracted subscription to the tune of Rs.95 cr approx., with retail investors showing more than a fair share of interest in the issue.
As can be noted from the offer at a glance table, four options as to tenor and interest rate are available to the investor. While Series 1 is for a tenor of 39 months, interest for this holding period is linked to a benchmark security, viz., 91 day Treasury Bill Rate + 315 basis points. At present, 91-day Treasury Bill yields about 3.28% p.a.
Based on the movement of T-Bill rate, interest payable on Series 1 NCDs would be reset every quarter. Series 2, 3 and 4 offer fixed interest rates of 8.2%, 7.91% and 8.3% for tenors of 60, 60 and 100 months respectively.
On allotment, the NCDs are proposed to be listed on the stock exchanges. What this means is that any gain/loss from the sale of these NCDs beyond a holding period of 12 months shall be treated as LTCG/L, subject to tax at 10% without indexation. Another additional benefit of listing is that there will be no TDS on the interest on the NCDs. Interest on the NCDs will, however, be taxed at the rate applicable to the investor.
JMFPL is a systemically important non-deposit taking NBFC. Though it offers loan products in Capital Market financing, Real Estate financing, Retail Mortgage financing, Structure financing and Financial Institution financing, the first two are the predominant segments, accounting for 81.57% of the total portfolio. Of the two, Real Estate financing is the overwhelming silo, accounting for 45.5% of the overall loan portfolio.
The company has focused on wholesale lending as explained by loans of the ticket size of Rs.25 cr and above accounting for 68.93% of the total loan portfolio and total exposure to 20 largest borrowers amounting to Rs.1,951 cr, or about 61% of the total loans.
While the concentrated lending has so far helped the company keep Gross and Net NPAs within reasonable bounds – GNPA @ 0.07%, 1.86% and 1.33% in fiscal 2019, 2020 and 2021 respectively and NNPA @ 0.06%, 1.09% and 0.76% in fiscal 2019, 2020 and 2021 respectively –it has also been responsible for the company reporting sub-optimal growth in both revenue and profitability, @ 6.8% and 3.5% respectively over the last 8 years.
Notwithstanding profitable operations, JMFPL’s capital allocation strategy has been far from ideal, with the company holding disproportionate sum in Investments in Mutual Fund schemes and GOI/Corporate bonds, in comparison to its loan portfolio:
| ASSETS |
FY 2020-21 |
FY 2019-20 |
||
|
Rs. |
% | Rs. |
% |
|
| Loans |
2,981 |
60% | 3,640 |
71% |
| Investments (other than GOI/Bonds) |
1,566 |
32% | 1,322 |
26% |
| GOI/Corporate Bonds |
420 |
8% | 137 |
3% |
| TOTAL |
4,967 |
100% | 5,099 |
100% |
However, from the point of view of investors in JMFPL’s NCDs, the company’s investment in Mutual Funds and GOI/Corporate bonds provides an additional cushion and safety.
On another plane, it is indeed surprising that as one of the long standing financial intermediaries in the business, JMFPL has opted to remain wholesale while the last decadal trend has been to become retail focussed. In doing so, JMFPL seems to have missed the party. Its recent attempt at course correction by entering into Retail Mortgage business appears to be too little too late.
According to JMFPL’s shelf Prospectus for NCDs, its Debt-Equity ratio would stand at 2.69 if it manages to raise the targeted Rs.1,500 cr through NCDs in one or more tranches (Pl ref below table).
| ASSETS |
Amount Rs. Cr |
| Debt (including Rs.1,500 cr target) |
4,778 |
| Other borrowings |
206 |
| TOTAL DEBT |
4,984 |
| Net Worth |
1,853 |
| Debt-Equity Ratio |
2.69 |
While JMFPL’s entire loan portfolio is secured and its Debt-Equity ratio looks optically reasonable, JMFPL’s penchant for lending to real estate developers for acquisition of land parcels, which constitute the bulk of its real estate lending, is fraught with considerable risk.
What’s more, JMFPL’s continued indulgence in related party transactions as well the potential conflict of interest with its promoters, directors and related parties, who are engaged in similar business, implies that the investors have to be cautious.
On balance, while the yield on offer from the Secured, Redeemable NCDs is slightly higher than what a retail investor can obtain from the organised financial system, it comes packaged with lack of liquidity (notwithstanding the stock exchange listing) and exposure to above-average risk.