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2 NCDs out. Should you buy?

Muthoot Finance has more payment options. Religare Finvest is offering a higher rate.

With deposit rates on the downhill path on one hand, and inflation showing no signs of relenting, conservative investors may find themselves in a tricky situation. However, investors with moderate risk-taking ability may consider company debentures, which offer returns higher than most bank fixed deposits (FDs). Two such options are in the market right now—Religare Finvest Ltd and Muthoot Finance Ltd are out with their public issue of non-convertible debentures (NCDs).

The issues

Both companies plan to raise 250 crore from investors with the option of retaining another 250 crore each in case of oversubscription. Both the issues are secured, which means NCD investors share equal rights with other secured investors.

Both issues will be listed on BSE Ltd and the National Stock Exchange, which addresses the issue of liquidity. So a buyer has the option to get out of the NCD by selling it through the stock exchanges.

The companies

Both Religare Finvest and Muthoot Finance are non-banking finance companies (NBFCs) and are focused on niche category for business.

While a bulk of Religare Finvest’s loan book—about 70%—constitutes lending to small and medium enterprises (SMEs), Muthoot Finance is primarily in the business of giving business and personal loans with gold as collateral. Both issuers have grown significantly in the recent past and their credit ratings reflect stability and the ability to pay back.

Religare Finvest’s loan book has expanded by 75% over the last three years with reasonably good asset quality, though non-performing assets (NPAs) went up to 0.52% in the last fiscal. Even as a lot of concerns are surfacing regarding the asset quality of lenders due to rising NPAs in the banking system, Religare Finvest’s management remains confident of the asset quality. Says Kavi Arora, managing director and CEO, Religare Finvest, “The stress that we are seeing is largely in mid-size companies and not in SMEs." Arora draws comfort from the fact that 86% of the company’s loan book is secured.

Muthoot Finance witnessed its net profit growing at about 80% in fiscal year 2012, but its NPAs have also gone up. Says Oommen K. Mammen, chief financial officer, Muthoot Finance: “NPAs are not the right indicator for a company like ours. We classify NPAs as per the regulatory norms, but give time to the borrower; otherwise we have very liquid collateral which we can sell any time. So the right way is to look at the actual loss." The company wrote off debt worth 6.9 crore in FY12 against an asset size of at least 23,000 crore.

What should you do?

Both the issues are comparable on almost all grounds.

For investors looking at regular income, Muthoot Finance also has a monthly payment of interest option and you don’t compulsorily need a demat account to invest. It also has an additional option of two years tenor.

Although the debentures will be listed on stock exchanges, experts argue that liquidity is an issue and investors may have to hold the debentures till maturity, which makes tenor important for some investors.

Religare Finvest’s rate of interest is marginally higher, but it has limited options for tenors. The shortest duration of investment, assuming debenture held to maturity, is three years.

Overall, investors with moderate risk-taking ability and willing to diversify outside bank fixed deposits may choose to divide their investment depending on their needs.

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