NCD Issue - MUTHOOTTU MINI FINANCIERS
By Geetanjali Kedia
Introduction:
Muthoottu Mini Financiers (different from the listed Muthoot Finance), is entering the debt capital market with a maiden public issue of secured 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.
Issue Details: Opening on 17th February 2014 and closing on 12th March, company has option to either close the issue earlier or extend closing. Minimum application amount is Rs. 5,000, and in multiples of Rs, 1,000 thereof.
Rating: ‘BB+’ by CARE indicating moderate risk of default regarding timely servicing of financial obligations
Listing: On BSE with one NCD comprising a trading lot. NCDs will be issued both in physical and demat form, while trading 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 | Interest payment | Tenure | Coupon Rate (% p.a.) | Effective Yield (% p.a.) | Redemption Amount (Rs./ NCD) |
| |||
|
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| General | Special* | General | Special* | General | Special* | |
| Series 1 | Monthly | 400 days | 12.00% | 12.25% | 12.68% | 12.96% | 1,000 | 1,000 | |
| Series II | Cumulative | 400 days | NA | NA | 12.50% | 12.75% | 1,137.78 | 1,140.55 | |
| Series III | Monthly | 2 years | 12.25% | 12.50% | 12.96% | 13.24% | 1,000 | 1,000 | |
| Series IV | Cumulative | 2 years | NA | NA | 12.50% | 12.75% | 1,265.63 | 1,271.26 | |
| Series V | Monthly | 3 years | 12.50% | 12.75% | 13.24% | 13.52% | 1,000 | 1,000 | |
| Series VI | Annual | 3 years | 13.00% | 13.25% | 13.00% | 13.25% | 1,000 | 1,000 | |
| Series VII | Cumulative | 3 years | NA | NA | 13.50% | 13.75% | 1,462.14 | 1,471.82 | |
| Series VIII | Cumulative | 5.5 years | NA | NA | 13.43% | 13.43% | 2,000 | 2,000 | |
*Includes senior citizens, ex-servicemen and existing debenture holders
Company Background:
First and foremost, this company is not part of the BSE/NSE listed gold loan lender Muthoot Finance, although similar sounding name and business profile.
Muthoottu Mini Financiers is a gold loan NBFC with operations in semi-urban and rural areas of Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, Delhi, Goa, Haryana and Maharashtra, having loan portfolio of Rs. 1,800 crore, as of 30th November 2013, comprising 3.4 lakh gold loan accounts served through a network of over 1,050 branches. Of this, 97% branches are concentrated in the 4 southern states.
For first eight months of FY14, company earned interest income of Rs. 282 crore and net profit of Rs. 29 crore, having networth of Rs. 400 crore as of 30th November 2013. Its gross and net NPAs are only 0.38% and 0.30% respectively. Its capital adequacy ratio stands at 19.25%, against RBI stipulated minimum of 15%.
Rate of Return:
The highest effective yield of 13.50% p.a. is being offered under Series VII for 3 years. However, this interest income will be subject to TDS and is taxable in the hands of the investors, making the post tax earnings at 9.33% p.a. (assuming 30.90% tax rate) for general category investors. This is favourable vis-à-vis any bank FD (since no bank is currently offering double digit interest rates for term deposits).
For investors with 10.30% or 20.60% effective tax rate, the post-tax yields works out to 12.11% pa and 10.72% pa respectively, which is favourable vis-à-vis tax free bonds of PSUs. However, the duration here is much shorter (3 years) compared to tax free bonds of 20 years, which addresses re-investment risk.
5.5 year NCDs has effective yield of 13.43%. Post tax, this leads to returns of 12.05% for 10.30% tax bracket, 10.66% for 20.60% and 9.28% for the highest tax slab. This may look appealing for non-tax payers or 10% tax payers, but the credit rating does not give adequate comfort, commensurate with the rate of return.
Recommendation:
Poor credit rating, company’s small size coupled with concentrated presence in the highly competitive and crowded gold loan market of South India make it a risky bet. Give it a miss.