Larsen and Tourbo: Invest

Recommendation: Invest

Anup Menon

AMONG the bonds issued by L&T in 1996, the deep discount bond, issued in three series in November 1996 at a face value of Rs 6,100 is an outstanding one.

A deep discount bond is one where the instrument is issued at a discount to its face value. The bond will be redeemed in a series of instalments at the end of the ninth (2005), 10th (2006) and 11th year (2007) at Rs 9,000, Rs 10,000 and Rs 11,000 respectively.

The DDB carries an early redemption option available to both the company and the bondholder that may be exercised in November 2001. The call option will be exercised at Rs 13,500 and the DDB's current market price is Rs 13,061. On the

basis that the company exercises the call option, the yield-to-maturity on the current market price is 14.14 per cent.

The probability that the company will recall the bond is high and, in that case, a YTM of 14.14 per cent is attractive even after accounting for transaction costs, considering the short time-frame of maturity. The bond has been trading in the Rs 12,500-13,000 range in the last couple of months. It touched a high of Rs 13,145 in May and continued to remain in the Rs 12,700-13,000 range. The bond is attractive at current prices.