Muthoot Fin
By Geetanjali Kedia
Introduction:
Muthoot Finance, India’s largest gold-loan NBFC in terms of loan portfolio, 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. 100 crore with an option to retain another Rs. 100 crore, taking the total fund raising to Rs.200 crore, for the fourth time this fiscal (after September, November and December 2013).
Issue Details:
Opened on 10th March 2014 and closing on 10th April, 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 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 (structure same as December issue, but rates 0.50% lower):
| 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 | 10.25% | 11.00% | 1,000 | 1,000 |
| Series II | Secured | Monthly | 3 years | 10.75% | 11.50% | 1,000 | 1,000 |
| Series III | Secured | Monthly | 5 years | 10.25% | 11.00% | 1,000 | 1,000 |
| Series IV | Secured | Annual | 2 years | 10.75% | 11.50% | 1,000 | 1,000 |
| Series V | Secured | Annual | 3 years | 11.00% | 11.75% | 1,000 | 1,000 |
| Series VI | Secured | Annual | 5 years | 10.75% | 11.50% | 1,000 | 1,000 |
| Series VII | Secured | Cumulative | 400 days | 9.75% | 10.50% | 1,107.76 | 1,116.13 |
| Series VIII | Secured | Cumulative | 2 years | 10.75% | 11.50% | 1,226.56 | 1,243.23 |
| Series IX | Secured | Cumulative | 3 years | 11.00% | 11.75% | 1,367.63 | 1,395.45 |
| Series X | Secured | Cumulative | 5 years | 10.75% | 11.50% | 1,666.17 | 1,723.35 |
| Series XI | Unsecured | Cumulative | 6 years 3 months | 10.96% | 11.70% | 1,917.51 | 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. 22,262 crore as of 31st December 2013, comprising about 62 lakh gold loan accounts served through a network of 4,260 branches. For first nine months of FY14, company earned revenue of Rs. 3,788 crore and net profit of Rs. 599 crore, having networth of Rs. 4,121 crore as of 31st December 2013. Company’s financial position however remains strong, and it has also ventured into money transfer and foreign currency retailing through its existing branches and is establishing white-label ATMs, having received approval for the same from RBI.
Rate of Return:
The highest effective yield of 11.75% 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 8.08%-8.12% 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 being issued by several PSUs such as National Housing Bank, HUDCO and IRFCL.
3 years is not a very long duration to address re-investment risk, while 5 year NCDs have effective yield of 11.50%. Series XI (6 years 3 months) NCD has a long duration, but doubling of capital in 6 years and 3 months with effective yield of 11.70% 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.
Only for investors in the 10% tax bracket, the Series V or Series IX NCDs are worth considering as post-tax returns will be a meaningful 10.54% pa. Even in the 20% tax bracket, net-of-tax return is 9.33%, which is not favourable vis-à-vis the longer duration tax free bonds of 15 years offering 8.88% pa.
Recommendation:
Avoid Muthoot’s current issue - it is no different than the previous issue made by the company in December last year (other than lower coupon rate of 50 basis points). Instead go for IRFCL’s 15 year tax free bonds, which are still under-subscribed and offering 8.88% pa for 15 years.