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.

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Muthoot Finance NCD Returns Details

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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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NCDs by Muthoot Finance

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Issue of Secured Non-Convertible Debentures by Muthoot Finance Ltd

Issue details:

Issuer/ Borrower	Muthoot Finance Ltd.
Issue Open	December 22, 2011
Issue Close	January 07, 2012
Issue Size	Rs 3000 Million with an option to retain over subscription up to Rs 3000 Million
Nature of Instrument	Secured, Redeemable, Non-Convertible Debentures
Credit Rating	„AA- /Stable‟ by CRISIL „AA-/Stable‟ by ICRA
Security	First pari passu charge on the identified immovable property and a first pari passu charge on current assets, book debts, loans and advances, and receivables including gold loan receivables, both present and future.
Allocation	Institutional- Up to 20%  Non Institutional- Up to 40% Retail- Up to 40%
Instrument Form	Only Demat
Face Value	Rs. 1,000
Market Lot	One NCD
Listing	BSE
Registrar	Link In Time India Pvt Ltd
Lead Managers	ICICI Securities Ltd, A.K Capital Services Ltd, HDFC Bank Ltd, Karvy Investor Services Ltd
Co-Lead Managers	RR Investors Capital Services Limited, SMC Capitals Ltd
Bankers to The Issue	HDFC Bank, IDBI Bank, ICICI Bank, IndusInd Bank, Axis Bank, Dhanlakshmi Bank
Depositories	NSDL & CDSL
Trustees	IDBI Trusteeship Services Ltd

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Muthoot Finance Limited NCD – 13% plus Fix returns

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Apart from attractive rates, the secured nature of Muthoot's lending (loans against gold) offers some margin of safety in terms of loan to value, investment grade rating (CRISIL AA-) and strong track record with 70 years of experience in gold financing business support the investment. An AA- rating is defined as carrying “very low credit risk”.

Investors can avoid the three year and five year instruments as the 0.25 percentage point higher than the two year rate of interest doesn't really make up for the risks of holding on for a longer tenure.

ABOUT THE COMPANY

Gold loans account for 99 per cent of Muthoot's assets under management with predominant exposure to South India. It has a low proportion of non-performing asset (gross NPA ratio of 0.31 as of June 2011) thanks to gold as collateral. Muthoot has made profits in at least last seven fiscal years. It has 120 tonnes of gold against which it lent at average loan-to-value of 72 per cent. The issue also gives comfort from the gold price movement perspective. Gold prices may continue to remain firm for some time given its safe haven status.

The assets under management are close to Rs 18,000 crore. The interest spreads (difference between interest earned and interest expended) of Muthoot was 10.9 per cent for the quarter ended June 2011. The company has been raising money from retail investors for quite some time through private placement of secured NCDs. As of June 2011, retail NCD borrowings accounted for 26 per cent of overall borrowing. The capital adequacy ratio of Muthoot is strong at 19.2 per cent as of June 2011 as against mandatory requirement of 15 per cent.

Issue opening date – 22 Dec 2011
Issue Closing date – 7 Jan 2012
Issue size – INR 300 Crore with an option to retain oversubscription upto INR 300 Crore aggregating to a total of INR 600 Crore.
Instrument – Public issue of Secured Non- Convertible Debenture (NCD)
Ratings – AA-/Stable by both Crisil & CARE
Face Value – INR 1000/NCD
Minimum Application – 5 NCD = INR 5000
Listing - BSE

Coupon Rate %	I	II	III	IV (Yield)
	13%	13.25%	13.25%	13.43%
Tenor	24 Months	36 Months	60 Months	66 Months
Interest Payment	Annual	Annual	Annual	Cumulative

A WORD OF CAUTION

Muthoot Finance is the fifth non-banking finance company (NBFC) to come up with a public issue of NCDs in the last couple of months. It is also fourth company in as many weeks to hit the market with secured NCD issue. Given such high dose of NCD issuances, investors should avoid allocating too large a portion of their portfolio to such NCDs.

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

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Muthoot Finance plans to Raise 600 crore via Bonds

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Muthoot Finance, country’s largest gold loan financing company, plans to raise 600 crore though public bonds sale as funding from banks get expensive after the central bank scratched out lenders against gold from the subsidised priority sector lenders’ list.

The issue will open on December 22, 2011, and close on January 7, 2012. The company is borrowing funds through two, three, five-year bonds and five-and-a-half year zero-coupon bonds.

It is cheaper to raise funds from public than to raise from banks. After the priority sector status on gold loans was removed by RBI, the loans have become expensive by 0.5.

He said that funds raised through the issue would be used to repay existing liabilities and towards lending and investment.

There are four investment options, including a 24-month plan, which will pay 13% coupon to different categories of investors, while 36-month and 60-month maturities will both pay a coupon of 13.25%. A 66-month option will pay a coupon of 13.43% to different categories of investors. The face value of each NCD is 1,000 and the minimum application is for five NCDs and in multiples of each NCD thereafter, the company said.

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

Download Application Forms

Submit the filled up form to Collection canter near you