Muthoot’s Non-Convertible Debenture

muthootEverybody’s talking about the Non-Convertible Debentures (NCD) these days with more and more companies coming out with these. In here I will discuss about NCD with an eye on the latest offering from Muthoot Finance Limited and whether one should consider it as an investment or not.

So, what is a Non-Convertible Debenture? Well, these are debentures or loans taken by a company from the general public which has no option of conversion to the shares of the company. So, you should understand two things here: 1. NCD is a loan taken from you. 2. It is non-convertible to shares of the company in the future. As you can understand NCDs are like bonds and other debt instruments, where you would get an interest for lending money to a company.

Now, a non-convertible debenture can be of two types: 1. Secured Non-Convertible Debenture, which is secured by the assets of the company, and 2. Unsecured Non-Convertible Debenture which are not secured by the assets of the company. So, if a company defaults or is in financial mess in case of a secured NCD, you can expect to get back your investments somewhat, compared to an unsecured NCD. As such unsecured NCDs are offered to the general public at a much higher interest rates compared to the secured NCDs.

Non-Convertible Debentures seems to be the flavor of the season now as we see that more and more NBFCs ( Non-Banking Financial Company) are coming out with such issues. The latest among them is Muthoot Finance Limited. Let us quickly see what Muthoot Finance Limited has to offer before we try and analyze it:

  • Secured Non-Convertible Debenture of Rs.1000/- Face value, which is redeemed at Face Value after 24, 36 and 60 months and 2-times the face value at 66 months.
  • Issue objective stated in the prospectus is –“ The funds raised through this Issue will be utilised for our various financing activities including lending and investments, to repay our existing liabilities or loans and towards our business operations including for our capital expenditure and working capital requirements, after meeting the expenditures of and related to the Issue and subject to applicable statutory/regulatory requirements.”
  • Interest Rates @ 13% per annum for 24 months and 13.25% per annum for 36 / 60 months and 13.43% for 66 months.
  • Cumulative option only for 66 months and for others, interests are payable annually.
  • Minimum application of 5 NCDs, that is Rs.5000/- .
  • Allotments will be made compulsorily in dematerialized form.
  • The NCD will be listed in BSE.
  • Both CRISIL and ICRA have assigned AA- (Stable) ratings to the issue.
  • Issue opens from December 22, 2011 to January 07, 2012.

I will now analyze this NCD issue from Muthoot Finance Ltd. Based on three parameters – company and industry outlook, security and your own need.

As far as company background is concerned, Muthoot Finance is a strong company with assets of nearly Rs.18000 crores and making profits in at least last seven fiscal years. It has quite a low amount of non-performing assets; that is those assets which do not bring any income to the company. This is mainly because of the nature of business the company is in; Muthoot Finance Ltd. is the largest gold loan provider in the country. However, in January 2011, the Reserve Bank of India (RBI) removed the benefit of priority sector status for bank lending to, and portfolios originated by, gold loan companies. So sourcing bank financing may be tough in future for such companies as Muthoot Finance Ltd. It also faces risks of increased operational costs due to unfavourable policies from the government and other authorities regarding gold loans and NBFCs in general. Also I would like to point out that gold prices is unlikely to suffer major drawdown in the near future and the company’s fortunes going down the drains is unlikely at least in the short-term. The objective of the issue is to maintain business, as is evident from their prospectus, and I see no danger to their business in the short term and vis-à-vis you getting back your money.

Both CRISIL and ICRA have accredited AA- (stable) rating to the issue and I think that risk to the investment in general is minimal. The AA means “very  low credit risk” and the minus sign refers to the low rating among such AA-rated companies.

Please take a look at these links for a detailed look at the credit ratings and the prospectus of the issue:

Now, coming to the all important question whether you should invest in the issue or not, here is my opinion. It is no wonder that we all love to get higher interests and returns from our investments and this Muthoot Finance Ltd.’s  NCD issue is certainly attractive with it’s fantastic interest rates. However, please remember that effective yields after tax comes to around 9 – 11.9%, for different people in different tax brackets. If it still seems to be attractive compared to Fixed Deposits in banks, do remember that your Fixed Deposits are insured up to Rs.1,00,000/-, whereas NCDs do not have such a guarantee. So, going blindly after high interest rates alone wouldn’t be that wise.Please also remember that trading for these NCDs at NSE and/or BSE is quiet low, so liquidity may be an issue for you, if you want to get out.

My final take on the Muthoot Finance Ltd.’s Non-Convertible Debenture issue would be to invest your surplus money for 24 months only. And if you do not have any surplus cash or do not want to take the risks that a NCD carries and safety is all that you want, no harm in avoiding this issue altogether.

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