Muthoot Fin
Introduction:
India’s largest gold-loan NBFC in terms of loan portfolio, Muthoot Finance has entered the debt capital market with a public issue of secured and unsecured redeemable non-convertible debentures (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, for the second time this fiscal, barely 2 months after its first issue closed in mid-September of 2013.
Issue Details:
Opened on 18th November and closing on 2nd December 2013, company has option to either close the issue earlier or extend closing. Minimum application amount is Rs. 10,000, and in multiples of Rs, 1,000 thereof.
Rating: Both secured and unsecured NCDs rated ‘AA-’ (same as the previous issue) by CRISIL and ICRA indicating high degree of safety for timely servicing of financial obligations.
Listing: On 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 (majority rates and structure same as September 2013 issue):
| Series | Type of NCD | Interest payment | Tenure | Effective Yield (% p.a.) | Redemption amount (Rs. per NCD) | |||
|
|
| (frequency) |
| Institutional Investors | Non-Institutional Investors | Institutional Investors | Non-Institutional Investors |
|
| Series 1 | Secured | Monthly | 2 years | 10.75% | 11.50% | 1,000 | 1,000 |
|
| Series II | Secured | Monthly | 3 years | 11.25% | 12.00% | 1,000 | 1,000 |
|
| Series III | Secured | Monthly | 5 years | 10.75% | 11.50% | 1,000 | 1,000 |
|
| Series IV | Secured | Annual | 2 years | 11.25% | 12.00% | 1,000 | 1,000 |
|
| Series V | Secured | Annual | 3 years | 11.50% | 12.25% | 1,000 | 1,000 |
|
| Series VI | Secured | Annual | 5 years | 11.25% | 12.00% | 1,000 | 1,000 |
|
| Series VII | Secured | Cumulative | 400 days | 10.75% | 11.00% | 1,118.92 | 1,121.71 |
|
| Series VIII | Secured | Cumulative | 2 years | 11.25% | 12.00% | 1,237.66 | 1,254.40 |
|
| Series IX | Secured | Cumulative | 3 years | 11.50% | 12.25% | 1,386.20 | 1,414.36 |
|
| Series X | Secured | Cumulative | 5 years | 11.25% | 12.00% | 1,704.12 | 1,762.34 |
|
| Series XI | Unsecured | Cumulative | 6 years | 11.50% | 12.25% | 1,921.54 | 2,000 |
|
Note: Non-institutional investors include retail investors, HUFs and corporates.
Company Background:
Muthoot Finance, one of the 26 contenders for RBI’s new banking licenses, has a gold loan portfolio of Rs. 24,051 crore as of 30th September 2013, comprising 62 lakh gold loan accounts served through a network of 4,229 branches. Although company is focusing on branch expansion in FY14, its average ticket size is falling while higher borrowing cost impacting margins. For H1FY14, company earned revenue of Rs. 2,579 crore and net profit of Rs. 405 crore, having networth of Rs. 4,010 crore as of 30th September 2013. Company’s financial position however remains strong, and it has also ventured into money transfer and foreign currency retailing through its existing branches.
Rate of Return:
The highest effective yield of 12.25% p.a. is being offered under Series V, IX and XI for 3 years secured NCD and 6 years unsecured NCD. However, this interest income will be subject to TDS and is taxable in the hands of the investors, making the post tax earnings in the range of 7.60-8.46% p.a. (assuming 30.90% tax rate) for non-institutional investors. While this may be favourable vis-à-vis any bank FD (since no bank is currently offering double digit interest rates for term deposits), the NCDs do not fare well compared to tax-free bonds which are to be issued by several PSUs over the next four months (host of PSUs have finance ministry approval to raise Rs. 48,000 crore in FY14). Infact, earlier issues of PFC, NHPC, IIFCL, HUDCO received overwhelming participating from retail investors.
3 years is not a very long duration to address re-investment, while 5 year NCDs have effective yield of 12%. 6 year NCD is a long duration, but doubling of capital in 6 years with effective yield of 12.25% is simply an eye-wash, as NCDs being unsecured rank below the current and earlier-issued secured NCDs. Thus, the current issue, both secured and unsecured NCD, is an avoid.
Recommendation:
Avoid the current issue. Instead wait for offer of tax-free bonds from PSUs, likely in the next few months.