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Business News/ Money / Calculators/  Product Crack: Muthoot Finance NCD
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Product Crack: Muthoot Finance NCD

This is an issue for investors willing to take some risk for their regular income

Prajakta Patil/MintPremium
Prajakta Patil/Mint

Muthoot Finance Ltd is raising yet another 200 crore through non-convertible debentures (NCD). This issue has the option to retain over-subscription of up to 200 crore and has both secured and unsecured NCDs on offer. It is open for institutional and individual investors; 90% is reserved for individuals.

What do you get?

There are multiple series on offer with interest coupons in the 10.75-11.50% range and tenors between 2 and 5 years for individual investors. You can choose between three monthly, three annual and four cumulative payout options. Cumulative payout means you will get all the accumulated interest at the end of the tenor along with the principal, and have a yield of 10.25-11.50%. While these options are all secured NCDs, there is one option which is unsecured. Secured NCDs represent senior debt, which means you will have first claim on security such as immovable property and other assets in the event of default. The unsecured NCD doesn’t carry these privileges. Its tenor is 6.5 years, in which time your money will double, giving you an effective yield of 11.23%.

The bonds are proposed to be listed on the Bombay Stock Exchange, which gives you a secondary market exit, if needed.

The risks

The debenture issue has been rated ICRA AA-/Stable; the company has maintained this rating for the past few years. ‘AA’ rating suggests that a company has a high ability to service debt and low credit risk, but the modifier ‘-’ suggests that within its category, the comparative standing is below average.

Muthoot is primarily a gold loan company which gives out personal and business loans secured by gold. Decline in gold prices can impact its values’ assets. The size of its short-term assets or advances has declined nearly 20% in FY14. Revenue decreased around 10% during this time and net profit was down 23%. It’s not the best time for gold loan companies, nevertheless, Muthoot has been in this business for many years and has maintained a stable level of non-performing assets in the past two years.

Mint Money take

Muthoot has been in the gold loan business for long and has a relatively large distribution network. But the segment itself goes through some uncertainty, which is reflected in the credit rating. If you are a fixed deposit investor looking to broaden your basket of regular income, give this one a miss. This is an issue for investors willing to take some risk for their regular income. For those who understand the cash flow risk of a gold loan non-banking finance company, monthly payout options are attractive and you can hold till maturity. But keep in mind that the interest is subject to tax at your income tax rate. Post-tax returns for those in the highest tax bracket will be 7.5-8% per annum.

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Published: 25 Aug 2014, 12:17 AM IST
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