DSIJ Mindshare

Financing The Financer

Fresh in the recent spate of corporate fund raising initiatives, the Muthoot Finance and Religare Finvest NCDs are offering investors attractive coupon rates and terms. Vidrum Mehta tells investors whether to invest in these.

Non-Convertible Debentures (NCDs) seem to be in vogue of late. And why not, when on one hand investors get an attractive coupon rate, and on the other, companies are able to raise funds easily even in an uncertain
environment. Investors usually get a coupon rate that is 200-300 basis points higher than those that regular fixed deposits in banks yield. Further, in the current higher interest rate scenario, these NCDs offer a very attractive rate, which tempts investors to park at least a portion of their portfolio in them.

This is evident from the fact that the recent NCD issues are receiving a very encouraging response from investors. In a short span of 15-20 days, around four to five companies have tapped the market to raise funds through the NCD route. These companies will raise approximately around Rs 2150 crore in funds in a short span of around one month.

This spate of NCDs was kick-started by India Infoline Finance (IIFL) through its NCD issue on 5th September 2012. The issue received an overwhelming response from investors and was oversubscribed by approximately 2.36x. Soon after came the Shriram City Union Finance NCD issue on 12th September, 2012 (at the time of writing this article, it was subscribed by 0.89x). We had carried analyses of these two NCD issues (available on our website www.dsij.in). Going ahead, SREI Infrastructure Finance is also raising funds through the NCD route.

At present, there are two companies that are tapping the market with their NCD issues, viz. Muthoot Finance and Religare Finvest. Are they worth investing in or should investors give them a miss? Here is a detailed analysis of the two issues that would help our readers.[PAGE BREAK]

Muthoot Finance

Muthoot Finance is a systematically important non-deposit accepting NBFC, and is the largest gold finance company in India in terms of its loan portfolio. As of 31st March, 2012, around 99 per cent of its revenues came from the gold loan business. The gold loans provided by the company increased by 55 per cent to Rs 24417 crore on a YoY basis.

The company’s Capital Adequacy Ratio (CAR) stood at 18.29 per cent, which is decent enough. It reported a stupendous growth in its net profit for FY2012, which stood at Rs 892 crore against Rs 494 crore during the same period last year. However, there are worries on the asset quality front – as of 31st March 2012, its net NPAs stood at 0.57 per cent against 0.33 per cent during the same period last year.

The funds raised by the company through this issue will be used for various financing activities, which includes lending and investment, repaying existing debts, and for various other requirements.

Religare Finvest

Religare Finvest is a subsidiary of Religare Enterprises, and is also a systematically important non-deposit accepting NBFC. It focusses majorly on financing small and medium enterprise (SME) and provides retail capital market finance. As of 31st March 2012, of its total loan book, SME finance accounted for around 70 per cent of the loan portfolio, retail capital market finance accounted for around 13 per cent, while the remaining 17 per cent was in the form of corporate loans and auto lease. For FY12, the loan book of the company increased by 40 per cent to Rs 12573 crore on a YoY basis. Further, its Capital Adequacy Ratio (CAR) improved by 349 basis points to 19.65 per cent, which is decent enough. Here too, there are problems with the asset quality. As of 31st March 2012, the net NPAs stood at 0.51 per cent against 0.02 per cent during the same period last year. The profits for the full year increased by 20 per cent to Rs 137 crore.

The objective of fund raising is for purposes similar to those of Muthoot Finance, as discussed earlier.[PAGE BREAK]

Issue Information

Muthoot Finance and Religare Finvest have both given five options each to investors, which are spread across various time horizons. Muthoot Finance has offered options of two, three, five and six years that have an effective yield in the range of 11.50-12.4 per cent. The third option has monthly interest rate payments, the fifth option is cumulative in nature and doubles the money in six years, while the remaining three options have annual coupon rates. The issue opened on 17th September, 2012 and the closing date is 5th October, 2012.

On the other hand, the first and second options of Religare Finvest are for 36 months each, while the third and fourth are both for 60 months. The fifth and the last options double the money in 70 months, which results in an effective yield of 12.618 per cent. The issue has already opened on 14th September, 2012, and is expected to close on 27th September, 2012.

Both the companies are tapping the market to raise approximately Rs 500 crore. This involves plans to raise Rs 250 crore with an option to retain over-subscription of Rs 250 crore. Note that the minimum application for both the issues is of Rs 10000 (10 NCDs with a face value of Rs 1000 each). Thereafter, the application can be made in multiples of Rs 1000 or one NCD. Both the NCDs will be listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

The tables show the horizon and the rates of interest available under various options for retail individuals:

Muthoot Finance
OptionsIIIIIIIVV
Tenure 24 months 36 months 60 months 72 months
Frequency Of Interest Payment Annual Annual Monthly Annual Cumulative
Minimum Application (Rs) 1000
Effective Rate (%) Per Annum 11.5 11.75 12.4 12 12.25
Redemption Amount (Rs/NCD)* NA NA NA NA 20000
*Assuming that the minimum amount is invested.

Religare Finvest
OptionsIIIIIIIVV
Tenure 36 months 60 months 70 months
Frequency Of Interest Payment Annual Cumulative Annual Cumulative Cumulative
Minimum Application (Rs) 10000
Effective Rate (%) Per Annum 12.25 12.5 12.618
Redemption Amount (Rs/NCD)* NA 14143.6 NA 18020.3 20000
*Assuming that the minimum amount is invested.
[PAGE BREAK]

Conclusion

One should note that India Infoline had the highest coupon rate of 12.75 per cent, as it was unsecured. Given the secured nature of these NCDs, we believe that these companies are also offering attractive coupons. The issue would be allotted on a ‘first come first served’ basis, and given the attractive coupon rate, there is a possibility that investors would rush in as in case of the IIFL NCD issue. Hence, investors should not wait for the last day to subscribe. Further, since the volumes on the exchanges are quite low, one should invest keeping in mind that there is a need to redeem at maturity. The interest received on the same would depend on the individual tax slabs (subject to normal tax rates).

Those who require more liquidity should go in for the third option (monthly interest payments) of Muthoot Finance. If one wishes to opt for a shorter tenure, say 24 months, one should select the first option offered by Muthoot Finance.

If we compare the fifth options of both the NCDs (which doubles the money), Religare doubles the money in 70 months as compared to Muthoot Finance, which requires 72 months for the same. One of the reasons for this could be that Religare Finvest is a subsidiary of Religare Enterprises (a diversified financial services company), which is listed on the bourses, while Muthoot Finance itself is listed on the exchange. One should note that a listed entity is more reliable and is more transparent as it regularly gives updates to investors and is also consistently under the regulators’ eye.

Further, a key risk associated with Muthoot Finance is high volatility in the prices of gold and the government’s norms that are affecting the business outlook of the company. The NPAs of both the companies are on a rising trend, which is definitely not a good sign.

We, at Dalal Street Investment Journal, believe that given the attractive yields, investors should park a small portion of their portfolio in the NCDs to diversify risk. Therefore, invest with a limited exposure.

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