Financial Bond Yields

Symbiosis Institute of Business Management MBA [Ex. Edu.] Batch 2012-2014

Semester II – Division - A, Group - 2

Anurag Verma: Roll No: 35413 Amol Surwade : Roll No: 35407 Arvind Verma : Roll No: 35415

Avinash Panchashkari : Roll No: 35417 Ameya Deshpande : Roll No: 35406

Aishwarya Dubey : Roll No: 35402 Jitendra Bhalerao : Roll No: 35429

Ghanashyam sahoo : Roll No: 35425 Sushant Jog : Roll No: 35481

Group 2

FM Assignment: Nature Care India Date of Submission: 06/04/2013

of 11

Group 2 MBA [Ex. Edu.] Batch 2012-2014, Semester – II

Assignment Nature Care India

Contents Background .......................................................................................................................................3

Vision ......................................................................................................................................................... 3

Mission ...................................................................................................................................................... 3

Company Highlights .................................................................................................................................. 3

Sector (FMCG) Highlights .......................................................................................................................... 3

Current Strategy ........................................................................................................................................ 3

Debt Issue ................................................................................................................................................. 4

Analysis ..................................................................................................................................................... 4

Investor Gains ........................................................................................................................................... 4

Borrower Gains ......................................................................................................................................... 4

Questions ..........................................................................................................................................5

Q1: What is the Intrinsic value of the bond? ............................................................................................ 5

Q2: What is the Yield to Maturity that the investor gets from these debentures? ................................. 6

Q3: If the Company calls the debentures at a premium of 10% of the face value at the end of 5th year,

and the investor decides to put the debentures, how much would be the yield to call for the

investors? .................................................................................................................................................. 7

Q4: Comparing the debt offerings of Nature Care with the other similar debt issues during the month,

Do you think that investing in the debt issue of Nature Care is more rewarding for the investors? ....... 9

Appendix ......................................................................................................................................... 10

Own Funds to Borrowed Funds .............................................................................................................. 10

Income Statement .................................................................................................................................. 10

Public Debts Issues .................................................................................................................................. 10

Key Market Rates .................................................................................................................................... 11

of 11



Background Incorporated in 1974, the product line broadly categorized into healthcare, personal care, & foods. The company has good depth into urban & rural India. It also has global distribution networks spread across USA, Australia, APAC, Middle East, and Europe, Africa.

Vision Dedicated to the health and well-being of every household

Mission We will be a leading company in nature-based solutions & outperform by focusing on expansion,

innovation, & acquisition.

Company Highlights Company has far reaching penetration into urban as well as rural India.

Delivered good results in the last 4 years despite adverse demand conditions.

Focusing on 3 key elements: Expansion, Innovation and Acquisition.

Extremely high Debt-Equity ratio.

Extremely comfortable position in terms of coverage of interest (See Income Statement)

Sector (FMCG) Highlights FMCG sector still remains the fourth largest sector in economy with a total market size in excess

of USD 13.1 billion.

Top 15 FMCG companies clocked sales and profit growth of 23% and 12% for the quarter ended

Sep, 2006.

FMCG Sector set on rapid growth trajectory with a projected growth by over 60% by 2010. This

translates an annual growth of 10% over a 5 year period.

Hair Care, Household Care, male grooming, chocolates, and confectionaries are fast growing

segment.

Total size of FMCG sector will rise from around ₹ 56,500 crore in 2005 to ₹ 92,100 crore in 2010.

Current Strategy In view of the emerging growth potential across the various segments of its products, the Board of Directors have decided to invest ₹ 150 crore in its different product segments in the next two years. Investments will be made primarily to spruce up its R&D, supply chain and IT infrastructure. The extremely comfortable position, in terms of coverage of its interest reflected in the Income Statement, has convinced the company management to raise the funds through the public issue of non-convertible debentures (NCD). On Jan 15, 2007 the management announced the public issue of debt to fund their capacity enhancement initiative.

of 11



Debt Issue Issue 1,50,00,000 non-convertible debentures with fixed interest rates.

Issue price of debentures is ₹ 100

Maturity Time is 9 years

Coupon rate or Rate of Interest offered is 10.2 %

Debentures have Call option. Company can call any time after 5 years.

Rating AAA, given by CRISIL

Analysis

Investor Gains

• As per the given market conditions of FMCG market growth and lower inflation will help to increase bond value thus capital gains from bonds will be increased.

• Even though these bond has a call back facility with minimum default risk, Investor would like to invest further in newly issued bonds with lower interest rate by issuer due to strong market conditions

• Excellent FMCG market conditions for nature care products will keep investors interested in long term investments

Borrower Gains

• AAA rating given by CRISIL will allow borrower to cut down on default risk premium on interest

rates. • Therefore borrower can borrow money from market at lower interest rates • Due to call back facility borrower can replace re -issue bonds with lower interest rates and at

higher Bond price. • Higher Debt to equity ratio will always give Nature Care top management a control over

decisions unlike control given to equity shareholders.

of 11



Questions

Q1: What is the Intrinsic value of the bond? "Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a

business during its remaining life." - Warren Buffett

Solution: ParV or Par Value : ₹100 Coupon Rate : 10.2% Years to Maturity : 9 years

Intrinsic Value or Bond Value or BV = n

n

2

2

1

1

k)(1

CF

k)(1

CF

k)(1

CF

+

nk)(1

ParV

Where k = 12% i.e. the Discounted current bonds market rate, n = 9 years, Par Value = 100, Coupon Rate

= 10.2%

CF1 = CF2 … CFn = ((Par Value * Coupon Rate) / 100) = (100 * 10.2/100) = 10.2

BV = 921 0.12)(1

10.2

12).0(1

10.2

12).0(1

10.2

+

90.12)(1

100

BV = 921 (1.12)

10.2

12).(1

10.2

12).(1

10.2 +

9(1.12)

100

Bond Value or Intrinsic Value = 90.41

Conclusion: Given the current market rate of 12.00% for a similar bond, a bond with a face value of ₹100.00 and paying a coupon rate of 10.20% (compounding Annually), should be selling for ₹90.41 (selling at a discount).

of 11



Q2: What is the Yield to Maturity that the investor gets from these debentures?

Solution:

ParV or Par Value : ₹100 Coupon Rate : 10.2% Years to Maturity : 9 years Current Bond Value : 90.41 Current Yield : The current yield is the annual interest payment divided by the bond’s current price. i.e. ((10.20/90.41) * 100) : 11.282 % Yield to Maturity (YTM) for a bond is the total return, interest plus capital gain, obtained from a bond held to maturity.

1. Substract the current bond value/price with the Par value Val = 100 – 90.14 = 9.86 The result is a discount and is stored in Val

2. Divide the discount i.e 9.86 by the remaining years to maturity (9 yrs) of the bond. This way we arrive at annualized capital gain. Val = 9.86/9 = 1.0955

3. Add the Annualized gain to the yearly interest (10.2) to obtain total annualized return. Val = 1.0955 + 10.2 = 11.2955

4. Divide the annualized return (11.2955) by the current price (90.14) to obtain yield

Val = (11.2955/ 90.14) * 100 = 12.53 % (Name as A)

5. Subtract Annualized capital gain (1.0955) from par value Val = 100 – 1.0955 = 98.9045

6. Divide the Annualized return 11.2955 by the result from previous step Val = (11.2955 / 98.9045) * 100 = 11.4206 (Name as B)

7. Take average of A and B. This is our YTM

i.e. Val = (A + B )/2 = (12.53 + 11.4206 )/2 = 11.975 Ideally YTM is generally same as the bonds market rate of interest so it should come be equal to 12 %

YTM : 11.975% Conclusion: A bond with a face value of ₹100.00 purchased for ₹90.41, paying annual coupon payments of ₹10.20, will have an annualized rate of return of 12.000% if the bond is held until its maturity (9 years).

http://www.wikihow.com/Price-a-Bond

of 11



Q3: If the Company calls the debentures at a premium of 10% of the face value

at the end of 5th year, and the investor decides to put the debentures, how

much would be the yield to call for the investors?

Solution:

BV or Bond Value : ₹90.41 (As calculated in Q2) ParV or Par Value : ₹100 Coupon Rate : 10.2% Years to Maturity : 9 years N or Years Until Call date : 5 years K or Yield to Call : ? In order to calculate Yield to Call, we need to solve this equation

Bond Value = N21 k)(1

INT

k)(1

INT

k)(1

INT

+

Nk)(1

Price Call

Where Call Price : ₹110 (Par Value + premium of 10% of Par value) INT : (ParV * Coupon Rate )/100 = 100 * 10.2/100 = 10.2 and k = Yield to Call

90.41 = 521 k)(1

10.2

k)(1

10.2

k)(1

10.2

+

5k)(1

110

After solving the above equation :

Yield to Call i.e. YTC would be 14.39%

of 11



of 11



Q4: Comparing the debt offerings of Nature Care with the other similar debt

issues during the month, Do you think that investing in the debt issue of

Nature Care is more rewarding for the investors?

Solution:

The comparison is not a real Apple to Apple one, because the Ratings, Maturity date, and the Current interest rates of other debt issuers are not same as Nature Care’s issue. However, a comparison can be done based on the Current Yield of all public debt issues with Nature Care’s. This will tell, how much a investor can expect by seeing the Current Yield of all debt issuers for the current year. We have to first calculate the Current Bond Value and the Current Yield of all the existing issues. Bond Value and Current Yield have been shown in the 2nd last and last column in the below table. Please note that, in the table below, the Current Rate has been taken from Table - 4 (See Appendix)

Sr No.

Name of Issuer Coupon Rate

Maturity (Years)

Current Market

Rate

Par Value

Bond Value

Current Yield

1 LIC Housing Finance

9.10% 10 7.62 % (Govt. Security)

100 110.10 8.265 %

2 Punjab State Industrial Development Corp.

9.32% 10 7.62 % (Govt. Security)

100 111.61 8.350 %

3 Rural Electrification Corp. Ltd.

8.85% 10 8.79% (Govt. PSU)

100 100.39 8.815 %

4 Sundaram Finance Ltd.

9.60% 5 12% (Same as NCI)

100 91.35 10.509 %

5 Yes Bank Ltd. 9.6% 15 6 % (Bank Rate)

100 134.96 7.113 %

6 Bank of Rajasthan 9.50% 10 6 % (Bank Rate)

100 125.76 7.554 %

For Nature Care India

BV or Bond Value : ₹90.41 (As calculated in Q2) Current Yield : 11.282 % Yield To Maturity : 12%

By seeing the table above, The Current Yield of Nature Care India is greater than the Current Yield of

other debt issues, and it can be concluded that investing in this issue is more rewarding for the

investors.

of 11



Appendix

Own Funds to Borrowed Funds

Profit / Loss Mar 2005 (₹ Crore)

Mar 2006 (₹ Crore)

Net Worth 338.07 447.87

Reserves and Surplus 309.43 390.54

Total Borrowings 48.63 20.57

Secured Borrowings 15.7 19.23

Unsecured Borrowings 32.93 1.34

Current portion of Long-Term debt 8.06 00

Table - 1

Income Statement Profit / Loss Mar 2005 Mar 2006

PBDIT 186.72 239.85

Financial charges 4.65 5.73

PBDT 182.07 234.12

Depreciation 17.10 19.05

PBT 164.97 215.07

Tax Provision 17.00 25.78

PAT 147.97 189.29

Dividends 81.37 114.39

Retained Earnings 66.6 74.90

Table - 2

Public Debts Issues

Sr No.

Name of Issuer Rate Maturity (Years)

Rating Amount (₹ crores)

Instrument Type

1 LIC Housing Finance 9.10 10 AAA 265 Bonds

2 Punjab State Industrial Development Corp.

9.32 10 N.A 30 Bonds

3 Rural Electrification Corp. Ltd.

8.85 10 AAA 500 Bonds

4 Sundaram Finance Ltd. 9.60 5 AA+ 100 NCD

5 Yes Bank Ltd. 9.60 15 A+ 75 Bonds

6 Bank of Rajasthan 9.50 10 A 100 NCD

Table - 3

of 11



Key Market Rates

Type of Debt Securities Rate of Interest Government Securities

10 years 7.62 %

11 years 7.79 %

15 years 8.07 %

PSU Bonds (AAA) – 5 years 8.79%

Treasury Bill

91 days 6.98 %

182 days 7.32 %

364 days 7.39

Bank Rate 6.00 %

Commercial (PR + 1)- 90 days 9.40 %

Table - 4

Financial Bond Yields

Economy & Finance

Transcript of Financial Bond Yields