What to do with TATA Capital NCD

When TATA Capital opened its Non-Convertible Debenture way back in Feb 2009, one investor asked us, "Can TATAs be trusted?" His apprehension was valid since TATA Groups was in big debt after its acquisition of American steel company Corus and British Automobile maker Jaguar.

Few investors heeded to our advise and invested in TATA Capital NCD which offered 11% for quarterly option and 12% for annual option.

After 11 months, in Jan 2010, let us take stock if this investment was worth it.

Look into the attached table : it is self explanatory. Current Price of a NCD with face value of Rs.1000 is Rs.1190.
After receiving interest for 9 months, the capital gain per debenture works out 19%. On an absolute basis, the net return works out to 27.50%. What else you want on earth. On a Fixed Income Investment if you can get such high return, it is THE BEST RETURN.

If you have TATA NCD. What should you do?

At 11% basis, current 27% is like realizing two and a half years interest in the first year itself.

Hence Investors can redeem the investment at such high return and can invest in better avenues. Even if the fund remains uninvested for the next one and a half years, it doesnot matter : we have already realized the returns.

If our judgement is right, the market price of Rs.1190 may come down in March 2010. Because Inflation is expected to rise from current 2% to 8% by March 2010. That is a 400% rise in inflation. Normally RBI would hike interest rates in line with inflation.

If RBI rises interest rates, existing NCDs like TATAs would lose their premium. It simply means you would miss the premium that you are curently enjoying.

It could be wiser to sell the NCD now and look for better investment avenue. Probably we could buy the same TATA NCD at much cheaper price.

Note: Similar is the market premium for other two debentures: Shriram Transport debenture is trading @ Rs.1113 and L&T Debenture is @ Rs.1099. Same strategy could be adopted for both these debentures.