Muthoot Finance Again Issues NCD: Should you subscribe?

Approximately 52% of the Sept 2011 NCD issue was subscribed by investors for a horizon of 5 years. In the Dec 2011 issue too, most of the subscription was for the longer duration option. Though the longer duration option provide better rates, one should also note that investors have confidence in the company’s business and are therefore ready to invest for a longer tenure.

The funds raised by the company are probably fully utilized, which is evident from its gold loan book that has increased from Rs 15728 crore in FY11 to Rs 22885 crore as on Dec 31, 2011. The funds raised through this issue will be used by Muthoot Finance for its financing activities, working capital requirements etc.

Issue Information

This issue is almost similar to the previous issue that the company had made in Dec 2011. The issue opens on Mar 2, 2012, and closes on Mar 17, 2012. The minimum application value is of Rs 5000 (5 NCDs of FV Rs 1000 each) and investors can apply in multiples thereafter. The issue gives an attractive yield in the range of 13%-13.43%, available over various time horizons. The 4th option, which doubles the money in five and a half years, is reminiscent of the erstwhile Indira Vikas Patra, which is defunct now.

The Issue Information table shows the horizon and the rates of interest available under the various options:

The average cost of borrowing for the company is around 12%, while the yield on advances is around 22%, which ultimately results in better margins for the company. The loan to value, which is the percentage of loan given by the company against the value of the gold, is approximately around 67%, which also should be considered at decent level. Its average ticket size as on Dec 31, 2011 is Rs 39000, which is higher than Rs 35000 as in the Sept 2011 quarter. In the first nine months of this fiscal, the Gross NPA of the company has almost doubled to 0.57%. However, the management said that there is no reason to worry, as the company can quickly recover the amount by auctioning the ornaments.

Conclusion:

Even though the company is offering a good yield, one should not invest one’s entire savings in it but should invest with limited exposure. It should be noted that the liquidity in this case is quite less, which can be seen from the volumes of the previous debentures that the company raised and are listed on BSE. With the interest rates expected to reverse soon, there might not be many opportunities going ahead. Investors who do not require funds in the short to near term may invest in the 4th option, and others could could choose from any of the other options.