Investment Management Project

On
Fundamental Analysis of bond of SREI Infrastructure
Finance May 2014 NCD Public Issue and preparing Debt
Research report from an investors 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 investors 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
SREIs ability to pay its debt. It is the most important component of any companys
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 companys credit rating.
On the basis of the findings of the above given ratios and financial analysis, well 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 companys 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 for
securitized 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 issuers 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 securitys priority of claim
against the issuing firms assets.
vii. Market position of the company products is judged by the demand for the products,
competitors 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 companys 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 5000,00,000.00
THE KARUR VYSYA BANK
LIMITED
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
SIFLs 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. SIFLs 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 of
availability of higher debts to fund the same, overall gearing ratio continued to remain
satisfactory at 4.84 as on Mar.31, 2014 (vis--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
SIFLs 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
SIFLs total income grew by 8.4% in FY14 over FY13 to reach Rs.1, 805.9 crore. Its interest
income 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 enterprises ability to meet its debt and other
obligations. The solvency ratio indicates whether a companys 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 companys 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
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that the portion of assets provided by creditors is greater than the portion of assets provided
by stockholders.
Creditors usually like a low debt to equity ratio because a low ratio (less than 1) is the
indication of greater protection to their money. But stockholders like to get benefit from the
funds provided by the creditors therefore they would like a high debt to equity ratio.
Long term debt to equity ratio

It is a way to determine a company's leverage. The ratio is calculated by taking the company's
long-term debt and dividing it by the total value of its preferred and common stock.
The greater a company's leverage, the higher the ratio. Generally, companies with higher rati
os are thought to be more risky becausethey have more liabilities and less equity.
Interest coverage ratio
0 1 2 3 4
2014
2013
2012
2011
2010
Long Term Debt Equity Ratio
Long Term Debt Equity
Ratio
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This ratio measures the companys 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 companys 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
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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 companys short-term liquidity. The quick ratio measures a companys
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













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