This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]
Muthoot Finance Limited will be the next company to come out with its issue of non-convertible debentures (NCDs) this month from September 17th. This issue will be the fourth issue from the company’s shelf in just over one year’s time.
Muthoot collected Rs. 1,413 crore through its previous three issues – Rs. 693 crore from Series I, Rs. 460 crore from Series II and Rs. 260 crore from Series III. The size of this NCD issue is Rs. 500 crore including a green-shoe option of Rs. 250 crore.
The company plans to use the proceeds for various financing activities including lending and investments, to repay existing loans, for capital expenditures and other working capital requirements.
About Muthoot Finance Limited
Muthoot Finance Limited, a flagship company of the Muthoot group, is primarily into the gold financing business which constitutes 99% of its total advances. It is also the largest gold loan company in India. Muthoot started its lending business in 2001 after getting RBI’s registration to function as an NBFC and currently it has a network of 3,780 branches all over India. The company till date has no major plans to diversify its business from gold loans to any other streams of financing.
Financials of the company
During the year ended March 31, 2012, the loan book of the company stood at Rs. 21,338 crore as against Rs. 11,682 crore during the year ended March 31, 2011, an increase of approximately 83%. Assets under management (AUM) stood at 26,707 crore in FY12 vs. 18,152 crore in FY11.
Muthoot reported revenues of Rs. 4,549 crore in FY12 as against Rs.2,316 crore in FY11, a jump of almost 96%. Net profit of the company increased by a massive 81% from 494 crore in FY11 to 892 crore in FY12.
Gross NPAs and Net NPAs of the company stood at 0.56% and 0.57% respectively as on March 31, 2012 as against 0.29% and 0.33% respectively as on March 31, 2011. Debt Equity Ratio of the company stands at 6.63 times before this issue and will result in 6.80 times after this issue.
Here is the link to check the latest audited financial results of the company ending March 31, 2012.
About the NCD Issue
This issue has seen a cut of 1.50% or 1.25% per annum in its interest rates across the board vis-a-vis its last two issues which the company came out with during December 2011 and March 2012 respectively. I do not understand the rationale behind this massive rate cut as the fundamentals of the company or the fortunes of the gold loan business have only deteriorated since then, as the Reserve Bank of India (RBI) has become stricter with the gold financing norms. Competition from the banks and other gold financing companies has also increased quite considerably.
I think the reason for this cut could only be attributed to the fact that during the previous two issues, the investors were not in a mood to invest any money in Muthoot NCDs after a severe beating all the listed NCDs suffered last year. Also, during that period, there was a flood of tax-free bonds and tax saving infrastructure bonds, which was keeping all the investors busy and ignorant to the Muthoot NCDs. In fact the company had decided to extend the closing date of its last issue from March 17th to April 9th and still the issue closed undersubscribed after remaining open for 39 days from March 2nd. So, I think the rate cut is not justifiable.
Here is the link to check the list of all previous Muthoot Finance NCD issues.
Though Muthoot’s loan portfolio has only one component in the form of gold loans but as far as the interest rates and maturity periods are concerned, the company always offer a bucketful of options. This year also they have many options – 2 Year NCDs, 3 Year NCDs, 5 Year NCDs and 6 Year NCDs offering 11.50%, 11.75%, 12% and 12.25% per annum respectively. “Option V†this year offers to double your money in 6 years, which was 5.5 years in the last two issues. Religare Finvest NCDs are promising to do the same for you in 70 months i.e. 5 years and 10 months, 2 months earlier than Muthoot. There is an option of monthly interest also but that is there only in the 5 year option with 11.75% p.a. rate of interest.
| Option | I | II | III | IV | V |
| Tenor | 2 Years | 3 Years | 5 Years | 5 Years | 6 Years |
| Coupon – 2012 | 11.50% | 11.75% | 11.75% | 12% | 12.25% |
| Interest Payment Frequency | Annual | Annual | Monthly | Annual | Cumulative |
| Redemption Amount | Rs. 1000 | Rs. 1000 | Rs. 1000 | Rs. 1000 | Rs. 2000 |
| Coupon FY2011 – I | 12% | 12.25% | N.A. | 12.25% | N.A. |
| Coupon FY2011 – II | 13% | 13.25% | N.A. | 13.25% | 13.43% |
| Coupin FY2011 – III | 13% | 13.25% | N.A. | 13.25% | 13.43% |
| Market Price FY2011 – I | Rs. 1000 | Rs. 980.2 | N.A. | Rs. 965.8 | N.A. |
| Market Price FY2011 – II | Rs. 1076.8 | Rs. 1067 | N.A. | Rs. 1080 | Rs. 1091 |
| Market Price FY2011 – III | Rs. 1036 | Rs. 1053 | N.A. | Rs. 1050 | Rs. 1058 |
* Tenor for 2nd and 3rd issue in FY 2011 under Option V was 5.5 years instead of 6 years.
** Interest Payment Dates: Issue I – September 14 every year, Issue II – January 18 every year, Issue III – April 18 every year
*** Data as on September 13, 2012
The interest earned will be taxable as per the tax slab of the investor but the company will not deduct any TDS on the NCDs taken in the demat form. The company has decided to keep the minimum investment requirement of Rs.10,000 (or 10 bonds of face value Rs. 1,000) which is on a higher side as compared to Rs. 5,000 which was there with the NCD issues of IIFFL and Shriram City Union Finance Limited (SCUF).
50% of the issue is reserved for the retail investors i.e. for individual or HUF investors investing up to Rs. 5 lakhs, 35% of the issue is reserved for the non-institutional investors and HNIs and the remaining 15% of the issue is reserved for the institutional investors. Again, NRIs and foreign nationals among others are not eligible to invest in this issue. The allotment will be made on a “first-come-first-served†basis.
These bonds will also list on both the stock exchanges – NSE and BSE. Investors will have the option to apply these bonds in physical form also except the “Option V†bonds which are available only in the demat mode. The issue has been rated ‘AA-/Stable’ by CRISIL and ‘[ICRA] AA-(Stable)’ by ICRA.
Performance of the bonds issued last year
Most of the NCDs issued by Muthoot during January and April this year, offering 13% coupon or more, are still trading at a yield of 13% or more. NCDs with coupon 13% for 2 years in the second issue last year are trading at Rs. 1076.80, yielding 13.53% and NCDs with coupon 13.25% for 3 years in the same issue are trading at Rs. 1067, yielding 14.17%. You can check the prices of last year’s NCDs in the pasted table here.
I have a view that it is the most unattractive issue of this financial year. With other issuers offering better rates than Muthoot and its previous issues quoting at a yield of 13% plus, I find no single reason for me or for any of my family members or clients to invest in this NCD issue of Muthoot Finance. The issue gets closed on October 5, 2012.
Now almost all the companies, which issued their NCDs last year, have offered their first round of NCDs this year again. Only one out of all these issues, NCD issue of Shriram Transport Finance, has got listed and that is currently trading at a marginal discount to its issue price. It would be very interesting to observe how these NCDs list after RBI comes out with its monetary policy on 17th of this month. If we see a rate cut from RBI this time around, then there should be a rise in the prices of all the listed NCDs and bonds. Let’s see what RBI does after a very long awaited diesel price hike has happened.
Muthoot Finance NCDs to list on Wednesday, 7th November on the exchanges.
Source: http://www.bseindia.com/markets/MarketInfo/DispNewNoticesCirculars.aspx?page=20121105-11
hi shiv,
please tell me what does the n1,n2,n3 etc means in n.c.ds
thanks
Hi Sanjat… As far as I know, N1, N2, N3 etc. are just ‘Series’ of these NCDs or Tax-Free Bonds and they do not have any special significance.
I invested in Three ICICI mutual fund 3 X Rs.100000. Never got a call from them after. At the end of 3 years they send me check of 3 x Rs. 25000 . And when i inquired, they told me that the i did not pay the 2nd and 3ed installment and they have send a email remainder . I check all my emails and i could find an email in the Junk mail. I dint en cash the check. Now they say that u can pay 3 x Rs 300000 and we will activate your fund again and you can withdrew the whole fund after one year so that you can get your lost money back.
Now I like to do only safe investment and gone for FD.
Please advice me.
Looks like you invested in some ULIPs and not Mutual Funds. Please discuss your complete case with a good financial advisor and do not fall into any kind of trap.
Hi
I am new to NCDS. I have 3 quick questions.
1) Whats the risk of investments.
2) How will be the TDS Calculated.
3) Long term or Short Term is the best option.
Hi… NCDs are somewhat like Bank FDs. NCDs offer a fixed & higher rate of interest and many other features which make them look more attractive than Bank FDs. But, bank FDs are relatively more safe than these NCDs. At present most of these NCDs are yielding 11%-13% as compared to bank FDs which are offering in the range of 9%-10%.
1) NCDs carry default risk, interest rate risk, reinvestment risk among others. Bank FDs carry only default risk and reinvestment risk. Default risk is very low in bank FDs. Most NCDs are secured against certain assets of the company.
2) Taken in Demat form, there is no TDS on these NCDs. In physical form, TDS is there if the interest amount exceeds Rs. 5,000 in any financial year.
3) NCDs with a 3-year term and good interest rate are preferred by the investors.
Hi Shiv,
I’m a newbie & very new to this. I’m considering investing in Muthoot for 72 months.
1) Is it safe? … Should I go ahead ?
2) Would you rather I wait & buy it after it’s listed?
3) Now that Religare Finvest has closed & you mention it’s a far safer bet, should I attempt to buy it online & if so then at what price?
4) Would you suggest any other NCd/Bond I pick up & at what price if so, and some reasoning to back that.
Thanks for your answers 🙂
Hi Prakash,
1) It is a decision which only you need to take. I have not advised any of my clients to invest in this issue.
2) Buying on listing would depend on the listing price and the YTM.
3) I don’t remember I mentioned it anywhere that “Religare Finvest NCDs are a far safer bet than Muthoot Finance NCDs”.
4) This process requires deep analysis based on your requirements and asset allocation.
Hi,
Just a basic question. If Rs.10000 is invested in NCD at the offer price of Rs.1000, and Rs.10000 is invested after it is listed offered at Rs. 1100, how will it differ. I dont understand how yeild percentage will differ in 2 cases if NCD after listing goes up. If coupon rate is 13%, then it will be on Rs.10000, shouldn’t matter?
Thanks for answering all the questions
Hi Ashish,
In case of debentures, the interest is calculated on the face value of the debentures. Therefore, in your example, each debenture will give an interest of Rs. 130 p.a. (assuming the face value as Rs. 1000). In the first investment, since each debenture is purchased at Rs. 1000, the current yield works out to be (130/1000)*100 = 13%. However, in the second investment, the current yield is (130/1100)*100 = 11.81%.
This is similar to dividends on equity shares since it is also calculated as a percentage of the face value of the shares. However, it is unlike FDs where the interest is calculated on the total principle.
Manshu & Shiv: Please correct if there is a misunderstanding.
Hope this addresses your query.
Hi Mayank… your understanding is correct to an extent, except for the current yield of 11.81%. This is the yield you would realise if you get interest of Rs. 130 exactly after 1 year and these bonds are sold at Rs. 1,100 on the same day.
Yield to maturity (YTM) is the relevant yield for an investor who plans to hold the bond till maturity. Here is how to calculate the YTM of a bond or NCD – http://www.onemint.com/2012/07/25/how-to-calculate-yield-to-maturity-of-a-bond-or-ncd/
Hi Ashish… You missed one point. At the time of maturity, say after 5 years, you will get back only Rs. 10,000 and not Rs. 11,000. This Rs. 1,000 will count as a loss to you and your ultimate yield would fall to some extent due to this loss. Your interest income of Rs. 1,300 won’t get affected but the yield would be lower.
Closing Date of Muthoot NCD issue has been extended to October 22, 2012.
Hi Shiv,
Could you please explain the extent to which the secured NCD protect investors vis-a-vis other secured products like Bank FDs (upto Rs. 1 Lac), Post Office schemes, Govt. Bonds etc. Thank you.
Hi MShah… The difference lies in the fact that in case of default in Bank FDs (up to Rs. 1 lac) or Post Office Schemes or Govt. Bonds, the investors are assured of recovery of their investment, even if it has to be done by a third party like the Deposit Insurance and Credit Guarantee Corporation (DICGC) in case of Bank FDs or the Government of India in case of Post Office Schemes and Govt. Bonds.
In case of NCDs, even if they are secured, the onus of payment lies only with the issuer. No third party assistance would be there and if there is a fall in the value of the secured assets, there is no assurance of any kind that your investment would be returned back to you in full.
Hello Mr. Kukreja,
Many thanks to you for informing us that the Shriram NCDs have listed at a discount. I find that all the four options are trading at a discount and the yields work out to be greater than the coupon rates. This provides a good opportunity for those who missed applying for this issue.
This makes me wonder the reason why someone would sell their debentures for a loss especially when it is a AA rated one. Do you think there are some fundamental problems with the company? One reason could be that some investors might be in the need for cash, but this still does not explain the large number of sellers at a discount.
Your insight into this would be appreciated. Once again, kudos for sharing your thoughts through this blog.
Cheers!
Mayank
These sellers might want to put their money into higher yielding NCDs e.g. Muthoot 🙂 –
Hi Mayank… I don’t think there is any fundamental problem with the company as such. This time the company offered a very low rate of interest to the non-retail investors and that is why their interest is low.
And, you are right, one reason could be that some investors might be in the need for cash.
Also, as I mentioned earlier, these NCDs are mostly sold by the agents to their clients. In order to earn extra incentive, these same agents advise their clients to come out of it either on listing or whenever a new issue comes. As Vikas mentioned, these people might want to put their money into higher yielding NCDs.
Can any one explain how NCD actually works in a plain simple language ? 🙂
Thanks !
Hi Shalini… NCDs are like fixed deposits issued by various companies. These NCDs are debt instruments and therefore a liability for the issuer company. These NCDs pay fixed interest (or coupon) annually/monthly/quarterly or cumulative, depending on the option you select at the time of investing. Many of these NCDs are offered to the general public to invest their money and get listed on the stock exchanges for trading.
Once listed, the price of these NCDs move up or down depending on various factors like demand & supply for these NCDs, overall interest rate & inflation scenario etc. These NCDs carry many advantages over company FDs & Bank FDs. At the same time, their prices can go down also below the issue price.
After reading this article, I got excited to buy the Muthoot NCD from their last series – the one which doubles the money in 5.5 years. However, it seems to have risen from 1057 to 1090 this week
http://beta.bseindia.com/bseplus/StockReach/StockQuote/Equity/0mfl17/0MFL17/934844/COMPANY
I used the yield calculator at http://vindeep.com/Corporate/ZeroCouponBondYieldCalc.aspx
At the market price of 1090, the yield is coming out to be 12.69%
At the market price of 1057, the yield is coming out to be 13.36%
So, in less than a week the yield has fallen.
I think it would have been a good value pick at 1057.
Does anyone know of any other NCDs yielding >13% ? I tried a quick calculation this week – prices of NCDs seem to have gone up this week making the yield go down.
I find it is a lot of manual work to calculate the yields – seems like we need one place where we can see the yields of various bonds on an automated basis.
Does anyone know of such a website? Is it possible to access this system by paying a fee?
http://www.edelweiss.in/Debt/DebtSnapshot.aspx?cn=MFINNCD2A
http://www.edelweiss.in/Debt/DebtSnapshot.aspx?cn=1300MFL14
http://www.edelweiss.in/Debt/DebtSnapshot.aspx?cn=1325MFL15
http://www.edelweiss.in/Debt/DebtSnapshot.aspx?cn=RFLNCDO2C3
All these bonds are yielding more than 13%.
Thanks Shiv.
You are welcome! 🙂
Hi Shiv,
When you say “3rd issue in FY2011”, do you mean “1st issue in FY2012”?
According to this link, Muthoot has 3 series of NCDs – 2 in FY2011 and 1 in FY2012.
http://admin.muthootfinance.com/HomeReports/listed-ncd-details.pdf
Hi VikasG… Yes, you can say that. Initially the offer period was March 2nd to March 17th, which was extended to April 9th. That is why I termed it as the 3rd issue of FY2011.
To add to the recent discussion around FDs, what are your thoughts ‘Phadnis Infrastructure Fixed Deposit Schemes’? They have been issuing these for a long time now, with a interest rate upto 12.5%.
http://www.phadnisgroup.com/fd.html
I’ve not heard much about this group as it looks like it is predominantly based in Pune and Mumbai. Also, it is a private company. Personally, I would rather invest in a listed public company than a private company. Also, there is a cap of 12.50% p.a. interest rate offered by these companies.
For more such fixed deposit options, you can check this post: http://www.onemint.com/2012/08/21/best-company-fixed-deposits-returns-wise-safety-wise-be-wise/
I would wait and and buy this issue on listing… guess it would list at a discount offering a better yield.
It is more or less certain that these NCDs are going to list at a discount. Only something extraordinary can bail this issue out with its current terms.