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Muthoot Finance NCD – Should you subscribe?

By Vidrum Mehta | 12/20/2011 12:34 PM Tuesday

Read March 2012 Review of  Muthoot Finance Again Issues NCD: Should you subscribe?

Even in an uncertain equity market, Muthoot Finance is raising funds from the market frequently to meet the company's funding requirements. In Apr 2011, it came up with an IPO and raised funds worth Rs 900 cr. In Sep 2011, it tapped the market again and raised funds worth Rs 693 cr through the issue of debentures. Now, Muthoot Finance is tapping the market to raise funds up to Rs 600 cr through the issue of Secured Redeemable Non-Convertible Debentures (NCDs).

The previously raised funds were utilised well by the company, which is evident from the fact that its loan book stands at Rs 20940.4 cr as on Sep 30, 2011 up from Rs 15868.40 cr as on Mar 31, 2011. The funds raised through this issue will be used for various financing activities, to repay existing loans, for its working capital requirements, etc.

The issue will open on Dec 22, 2011 and will close on Jan 07, 2012. The minimum application is of 5 NCDs (Rs 5000), and thereafter, one can invest in multiples of one NCD (Rs 1000). The issue gives an attractive yield in the range of 13%-13.43%, available at various horizons. Given the attractive interest rate, investors should park a portion of their portfolio in the debentures. Its 4th option, which doubles the money in 5.5 years, reminds us of the now-defunct Indira Vikas Patra.

Muthoot Finance NCD Details

Options

I

II

III

IV

Tenure

24 months

36 months

60 months

66 months

Frequency of Interest Payment

Annually

Annually

Annually

NA

Minimum Application (Rs)

Rs 5,000 (5 NCD of FV Rs 1,000)

Effective Yield (%)

13

13.25

13.25

13.43

Redemption Amount (Rs/NCD)

NA

NA

NA

10000*

Issue Opens On

22-Dec-11

Issue Closes On

07-Jan-12

Issue Size

600 (300+300) crore

NCD Will Be Listed On

BSE

*Assuming amount invested is Rs 5,000

The loan to value is the percentage of the loan given by the company against the value of gold. This is approximately around 64% against the previous percentage of 72%. The company took this conservative measure after the higher volatility seen in gold.

Individuals avail themselves of loans by pledging their gold ornaments. Therefore, the common tendency of borrowers is to quickly repay the loan and get back their valuable ornaments. Having said that, the company's net NPAs have increased from 0.33% as of Mar 2011 to 0.58% as of Sep 2011. The management has said that there is no reason to worry, as the company can quickly recover the amount by auctioning the ornaments. The average ticket size of Rs 35000 in this category should be considered good, as the risk associated is less. The company's interest coverage ratio stands at 1.62x for HI FY12, which is also at a decent level.

Even though the company is offering a good yield, investors should not put their entire savings into it, but should have a 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 raised by the company and listed on the BSE.

We, at Dalal Street Investment Journal, believe that investors with a long-term horizon can opt for the 4th option. Others may choose any of the other options that have time frames of 2, 3 and 5 years respectively. Individuals can invest in the bond with a limited exposure, as there may be enough opportunities going ahead that would allow investors to diversify their portfolio.

Muthoot Finance Again Issues NCD: Should you subscribe?


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