Productcrack | Non-convertible debenture (NCD)

Productcrack | Non-convertible debenture (NCD)

Name of the product

Muthoot Finance Ltd’s NCD.

What is it?

It is a secured NCD, open to individuals as well as institutional investors, through which the company plans to raise Rs500 crore; it can retain oversubscription up to Rs500 crore.

What do you get?

There are three series on offer: option I is for 24 months, option II for 36 months and option III for 60 months. For individual investors, the annual interest offered is between 12% and 12.25%, payable annually. Also, 60% of the issue is reserved for retail investors (application up to Rs5 lakh) and allotment will be done on first-come-first-served basis.

Each NCD is worth Rs1,000. Investors need to buy at least five NCDs (worth Rs5,000) for each option.

The rating

The issue has been rated Crisil AA-/stable by Crisil and [Icra] AA-(stable) by Icra for an amount up to Rs1,000 crore. “AA" rating suggests that a company has a high ability for debt serving and low credit risk, but, the modifier “-" suggests that within its category the company’s comparative standing is below average.

The risks

The company is almost 100% in the gold loan business and all its advances are secured against it, so Muthoot may get affected by any meaningful decline in gold prices.

The debt-to-equity multiple of the company is 6.03, which is on the higher side. It will increase to 6.45 after issue if the entire Rs1,000 crore gets subscribed. Additionally, its capital adequacy ratio of 15.82% is very close to the level of 15% stipulated by the Reserve Bank of India. This means that for future growth and expansion, they will have to raise more capital. Given the current interest rate scenario, the average cost of funds for Muthoot is around 11%.

Mint money take

What works well for this issuer is the long-standing history in the gold loan business and the relatively broad distribution network supporting its business. Muthoot’s gold loan business was originally founded in 1939 and they currently have 2,733 branches across 20 states. But do remember its customer profile includes individuals who are otherwise unable to get such loans from the obvious banking channel and in that respect the risk of default may be high, even though average loan duration is three-six months.The 24-month NCD (option I) is priced attractively given the risk attached and offers a good opportunity for retail investors who are not completely risk averse.