Muthoot Fin
Introduction:
India’s largest gold-loan NBFC Muthoot Finance has entered the debt capital market with a public issue of secured redeemable non-convertible debentures (NCDs) and unsecured redeemable NCDs of face value Rs. 1,000 each, to raise Rs. 150 crore with an option to retain another Rs. 150 crore, taking the total fund raising to Rs. 300 crore.
Issue Details:
Opened on 2nd September and closes on 16th September 2013, with an option in company’s hands to either close the issue earlier or extend the closing. Minimum application amount is Rs 10,000, and in multiples of Rs, 1,000 thereof.
Rating: Both secured and unsecured NCDs rated ‘AA-’ by CRISIL and ICRA indicating high degree of safety for timely servicing of financial obligations.
Listing: To be listed and BSE with one NCD comprising a trading lot. NCDs in Series I to VI will be issued both in physical and demat form, while Series VII to XI NCDs will be issued compulsorily in demat form. Trading in all the NCDs would be compulsorily in demat form.
What’s on offer: The NCD issue has 11 investment options as under:
| Particulars | Type of NCD | Frequency of Interest payment | Tenure | Coupon Rate (% p.a.) | Effective Yield (% p.a.) | Redemption amount (per NCD) |
| Series 1 | Secured | Monthly | 2 years | 11.50% | 11.50% | Rs. 1,000 |
| Series II | Secured | Monthly | 3 years | 12.00% | 12.00% | Rs. 1,000 |
| Series III | Secured | Monthly | 5 years | 11.50% | 11.50% | Rs. 1,000 |
| Series IV | Secured | Annual | 2 years | 12.00% | 12.00% | Rs. 1,000 |
| Series V | Secured | Annual | 3 years | 12.25% | 12.25% | Rs. 1,000 |
| Series VI | Secured | Annual | 5 years | 12.00% | 12.00% | Rs. 1,000 |
| Series VII | Secured | Cumulative | 400 days | NA | 11.00% | Rs.1,121.71 |
| Series VIII | Secured | Cumulative | 2 years | NA | 12.00% | Rs.1,254.52 |
| Series IX | Secured | Cumulative | 3 years | NA | 12.55% | Rs. 1,425.76 |
| Series X | Secured | Cumulative | 5 years | NA | 12.00% | Rs. 1,762.78 |
| Series XI | Unsecured | Cumulative | 6 years | NA | 12.25% | Rs. 2,000 |
Company Background:
Muthoot Finance, one of the 26 contenders for new banking licenses, has a gold loan portfolio of Rs. 25,442 crore as of 30th June 2013, comprising 65 lakh gold loan accounts served through a network of 4,163 branches. For FY13, company earned revenue of Rs. 5,359 crore (up 18% YoY) and net profit of Rs. 1,004 crore (up 13% YoY). Company’s networth stands at Rs. 3,924 crore as of 30th June 2013, with CAR of 20.77%. For Q1FY14, its revenue stood at Rs. 1,284 crore and net profit Rs. 194 crore. Thus, the company enjoys sound financial position along with a healthy balance sheet.
Rate of Return:
The highest return is being offered under Series IX for 3 years secured NCD with 12.55% p.a. effective yield. However, this interest income will be subject to TDS and is taxable in the hands of the investors, making the post tax yields in the range of 7.60-8.69% (assuming 30.90% tax rate) for the above NCDs. While this may be favourable vis-à-vis any bank FD (since no bank is currently offering double digit interest rates for term deposits, these NCDs do not fare well compared to tax-free bonds being issues by public sector enterprises.
REC’s tax-free bonds are presently open for subscription (8.71% annual tax free interest for 15 years), while a host of other PSU are likely to hit the streets to garner upto Rs. 48,000 crore in tax-free bonds over the next one month. Thus, on a like-to-like comparison, Muthoot is offering 8.46% p.a. net return in 6 years as against 8.71% p.a. by REC for 15 years, making the former unappealing.
Doubling of capital in 6 years time, with effective yield of 12.25% may some eye-catchy to a few, note that those are unsecured NCDs, which will rank below the current and earlier-issued secured NCDs. Thus, the current issue looks uninviting for retail investors.
Recommendation:
Avoid the issue and look for tax-free bonds of longer duration being issued by PSUs.