Investors can make money from Muthoot Finance NCD

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As the interest rates are close to peak, many fixed-income investors are trying to lock-into instruments which offer high rates of interest.

To attract such investors, after a pause of four months, Muthoot Finance has come up with its second public issue of non-convertible debentures (NCD). 

Muthoot Finance, the largest gold loan company in India, is offering 13-13.25 per cent interest rates on 2, 3 and 5 year tenors. It also has a product which doubles your money in 66 months offering a pre-tax yield of 13.46 per cent.

Investors can consider subscribing to Muthoot Finance's secured NCDs, in light of the very attractive interest rates. However, investors should avoid exposing too much of their debt portfolio to this bond, given the risks inherent to the business. 

We think the company's reliance on a single lending product, namely gold loans, carries risks. The rates on the two year option are better than that on deposits from companies with similar credit ratings such as Shriram Transport (9.75 per cent), Dewan Housing Finance (10.5 per cent) and Mahindra Finance (10 per cent).

Given that only annual payout is offered it is a tough to calculate effective yields in the companies. In case of a two-year option, annual interest post-tax works out to 10.7 per cent, 9.5 per cent and 8.3 per cent respectively for an investor in the 10 per cent, 20 per cent and 30 per cent tax brackets (provided they pay tax, as there is no tax deductible at source).

Key Positives

Secured nature of the business with attractive net interest margins, low non-performing assets, credit rating of Crisil AA- (which implies high degree of safety regarding timely servicing of financial obligations and very low credit risk) are key positives.

These offset the risks from the company's heavy reliance on gold loan business and focus on South Indian market. The 63 per cent loan-to-value for the September quarter provides a margin of safety against gold price volatility.

Another advantage which Muthoot Finance enjoys is that the company's loan portfolio is of short-term nature, but the company is increasingly raising longer-term borrowings which reduce the refinancing risk for the company.

More than a 70 year track record in gold financing also gives confidence in the company, however, over the last few years the growth in the company has been very aggressive thanks to sharp rise in gold prices.

Capital adequacy ratio is also another concern as the capital is being consumed very fast by the company due to high rate of growth.

Muthoot Finance may have to raise equity next fiscal. The company's assets under management have grown at 81 per cent over the last four and a half years ended September 2011.

The issue carries a minimum investment amount of Rs 5,000.

The offer has already opened and closes on January 7 2012; with the company having an option to pre-close the issue. The allotment is on a first-come-first-served basis. The issue size is Rs 300 crore with an option to retain another Rs 300 crore oversubscription.

NCD holders can trade in these debentures in the secondary market (NSE and BSE) on listing.

However, investors are subject to liquidity risk given that volumes traded of such bonds are low.

You can download the forms below
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Muthoot Finance NCD Returns Details

Download Muthoot Finance NCD Application Forms

About Muthoot Finance Limited
Muthoot Finance Ltd is a NBFC incorporated in 1997 primarily provides loan against household used jewellery and offers other products and services like money transfer, insurance, securities, foreign exchange, vehicle and asset finance services. Gold loans account for 99% of Muthoot’s assets under management with predominant exposure to South India. 

Issue Size
The company plans for a public issue of secured, redeemable, non-convertible debentures (NCDs) of face value of Rs 1,000 each aggregating upto Rs 300 crore with an option to retain over subscription up to Rs 300 crore, aggregating to a total of upto Rs 600 crore.

Objective of the issue: 
The funds raised through this Issue will be utilized for various financing activities including lending and investments, to repay existing liabilities or loans and towards business operations including capital expenditure and working capital requirements, after meeting the expenditures of and related to the issue and subject to applicable statutory/regulatory requirements.

Issue Dates:
Issue Open: Dec 22 2011
Issue Close: Jan 07 2012

Investment Options
There are 4 options through which investment can be made in Muthoot Finance NCD as described in the picture below.

Ratings
The NCDs under this issue have been rated as AA -/Stable by CRISIL and ICRA. The rating indicates a high degree of safety with regard to timely servicing of financial obligations on the NCDs and such instruments carry a very low credit risk.

Why Invest in Muthoot Finance NCD
The interest rate of 13-13.43% is being offered to individuals for duration of 2 years, 3 years, as well as 5 years, 5.5 years is an attractive opportunity when compared to bank deposits which offer interest rate ranging 9 - 10.25%. Unlike bank deposits there is no TDS for the interest rate payments. These are secured instruments and hence backed by assets of the company. The NCDs will be listed in the BSE and NSE hence there is a chance for capital appreciation in case the RBI starts reducing interest rates after some month.

How to apply to Muthoot Finance NCD?
You can download the forms below

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Muthoot Finance Non Convertible Debentures

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Muthoot Finance Limited one of the leading gold financing company issues Non Convertible Debentures (NCD). The face value of a single unit is Rs. 1000 and the minimum required investment is Rs. 5000 and multiples of one bond thereafter. There are three investment options for these secured redeemable non convertible debentures according to the maturity of the debenture.

1.                  24 months NCD will be matured at the day it complete 24 months from the day of allotment and can earn 11.75% coupon rate.

2.                  36 months NCD will be matured at the day it complete 36 months from the day of allotment and can earn 12% coupon rate.

3.                  60 months NCD will be matured at the day it complete 36 months from the day of allotment and can earn 13.3% coupon rate.

The effective yield for the first option is 12% and the second and third options are 12.25% for corporate, individual and HUF investors.

The company’s gold loan portfolio as on March 31, 2011, comprised 47 lakh loan accounts serviced through 2,733 branches. The Company (Muthoot Finance Limited) plans to collect Rs. 500 crore through this NCD and w ill be utilised for various financing activities including lending and investments, to repay existing liabilities and to meet working capital requirements.

The NCDs have been rated AA-/stable by CRISIL and AA-(stable) by ICRA.

You can download the forms below

Download Application Forms

Submit filled up application    Collection canter near you