Company Overview
Muthoot Finance Limited (MFL) (MFL) is a non-deposit taking Non-Banking Financial Corporation (NBFC) headquartered in Kerala. Company has the long history of over 73 years in the gold financing business. The company has a branch network of 4,260 branches, spread across 21 states and 4 Union Territories (as on December 2013). The total employee strength of the company is 25,469 as on the same date. The main business of the company is to lend against the pledged gold jewellery and used household gold.
Business Analysis
The company generates its revenues mainly from the gold loan business. The total share of gold loan in the revenue pie of MFL was 98.44% for the year ended June 30, 2013. It also provides money transfer services through its branches, provides collection agency services (recently started) and has been operating three windmill projects in Tamil Nadu. Both the businesses have not been contributing much to the revenues of the company. MFL’s interest income has jumped from Rs 4,528 crore in financial year 2011-12 to Rs 5,364 crore in financial year 2012- 2013. Gross retail loan assets under management stood at Rs 22,588.6 crore as on December 31, 2013 (a decline from 26,386.8 crore in March 2013).
Company has been expanding its business fast in the last few years, which is clear from the revenue growth recorded by the company. Thus for various financing activities such as lending and investments, company is raising money through issuance of Redeemable Non-Convertible Debentures (NCDs). The proceeds may be used for repaying existing liabilities or may also be used for funding operational requirements of the business such as capex and working capital requirement.
The details of the offering (NCD) are as follows:
| Issuer |
Muthoot Finance Limited |
| Offering |
Public Issue by our Company of Secured NCDs and Unsecured NCDs aggregating upto Rs 100 crores with an option to retain over-subscription upto Rs 100 crores for issuance of additional Secured NCDs and Unsecured NCDs aggregating to a total of upto Rs 200 crores. The Unsecured NCDs will be in the nature of Subordinated Debt and will be eligible for Tier II capital. |
| Rating |
“[ICRA]AA-/Stable” by ICRA |
| Security |
Secured NCDs: First pari passu charge on the identified immovable property and a first pari passu charge on current assets, book debts, loans and advances, and receivables including gold loan receivables, both present and future of the Company. Unsecured NCDs: No security will be created for unsecured NCDs in the nature of Subordinated Debt |
| Face Value |
Rs 1,000 per NCD |
| Issue Price |
At par (Rs 1,000 per NCD) |
| Minimum Subscription |
10 NCDs and in multiples of 1 NCD thereafter |
| Tenure |
- Option I: 24 months (Monthly pay-out for interest)
- Option II: 36 months (Monthly pay-out for interest)
- Option III: 60 months (Monthly pay-out for interest)
- Option IV: 24 months (Annual pay-out for interest)
- Option V: 36 months (Annual pay-out for interest)
- Option VI: 60 months (Annual pay-out for interest)
- Option VII: 400 days (Cumulative)
- Option VIII: 24 months (Cumulative)
- Option IX: 36 months (Cumulative)
- Option X: 60 months (Cumulative)
- Option XI: 75 months (Unsecured NCD) (Cumulative)
|
| Coupon rate (For all categories of Investors i.e. Category I, Category II, Category III) |
- Option I: 11.00% p.a.
- Option II: 11.50% p.a.
- Option III: 11.00% p.a.
- Option IV: 11.50% p.a.
- Option V: 11.75% p.a.
- Option VI: 11.50% p.a.
- Option VII: N.A. (Since Cumulative)
- Option VIII: N.A. (Since Cumulative)
- Option IX: N.A. (Since Cumulative)
- Option X: N.A. (Since Cumulative)
- Option XI: N.A. (Since Cumulative) (Unsecured NCD)
|
| Trustee |
IDBI Trusteeship Services Limited |
| Listing |
BSE |
| Depository |
National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) |
| Registrars |
Link Intime India Private Limited |
| Issuance |
NCDs will be issued in both physical (to the extent permitted) as well as demat form. Trading in the NCDs will however take place compulsorily in demat form. Applicants cannot apply for Allotment of NCDs under Options VII, VIII, IX, X and XI in physical form |
| Issue Open Date |
March 10, 2014 |
| Issue Close Date |
April 10, 2014 |
| Deemed Date of Allotment |
Deemed Date of Allotment shall be the date as decided by the Board or the duly authorised committee of the Board constituted by resolution of the Board dated July 25, 2011, and as mentioned on the Allotment Advice / regret. All benefits under the NCDs including payment of interest will accrue to the NCD Holders from the Deemed Date of Allotment. Actual Allotment may occur on a date other than the Deemed Date of Allotment. |
| Quota |
Category III (Individual category)- Upto 90% of the overall issue size |
| Category III(Can apply only for all Series) |
- Resident Indian individuals and Hindu Undivided Families through the Karta
|
Note: PAN card is mandatory for subscribing to these NCDs. A self-attested copy shall be enclosed along with the application form.
(Source: Prospectus to the issue & PersonalFN Research)
Investors will also have the following options available at the time of subscribing to the issue:
| Options |
I |
II |
III |
| Minimum Application |
Rs 10,000 |
Rs 10,000 |
Rs 10,000 |
| Face Value |
Rs 1,000 |
Rs 1,000 |
Rs 1,000 |
| In Multiples of |
Rs 1,000 |
Rs 1,000 |
Rs 1,000 |
| Tenor |
24 months |
36 months |
60 months |
| Interest Payment |
Monthly |
Monthly |
Monthly |
| Coupon |
11.00% per annum |
11.50% per annum |
11.00% per annum |
| Tax slabs (%) |
10.3 |
20.6 |
30.9 |
10.3 |
20.6 |
30.9 |
10.3 |
20.6 |
30.9 |
Effective Yield -
Pre Tax (%) |
11.56 |
11.56 |
11.56 |
12.11 |
12.11 |
12.11 |
11.56 |
11.56 |
11.56 |
| Post Tax Returns (%) |
10.31 |
9.08 |
7.86 |
10.81 |
9.51 |
8.23 |
10.32 |
9.09 |
7.87 |
(Source: Prospectus to the issue & PersonalFN Research)
| Options |
IV |
V |
VI |
| Minimum Application |
Rs 10,000 |
Rs 10,000 |
Rs 10,000 |
| Face Value |
Rs 1,000 |
Rs 1,000 |
Rs 1,000 |
| In Multiples of |
Rs 1,000 |
Rs 1,000 |
Rs 1,000 |
| Tenor |
24 months |
36 months |
60 months |
| Interest Payment |
Annually |
Annually |
Annually |
| Coupon |
11.50% per annum |
11.75% per annum |
11.50% per annum |
| Tax slabs (%) |
10.3 |
20.6 |
30.9 |
10.3 |
20.6 |
30.9 |
10.3 |
20.6 |
30.9 |
Effective Yield -
Pre Tax (%) |
11.50 |
11.50 |
11.50 |
11.75 |
11.75 |
11.75 |
11.50 |
11.50 |
11.50 |
| Post Tax Returns (%) |
10.32 |
9.13 |
7.95 |
10.54 |
9.33 |
8.12 |
10.32 |
9.13 |
7.95 |
(Source: Prospectus to the issue & PersonalFN Research)
| Options |
VII |
VIII |
IX |
X |
| Minimum Application |
Rs 10,000 |
Rs 10,000 |
Rs 10,000 |
Rs 10,000 |
| Face Value |
Rs 1,000 |
Rs 1,000 |
Rs 1,000 |
Rs 1,000 |
| In Multiples of |
Rs 1,000 |
Rs 1,000 |
Rs 1,000 |
Rs 1,000 |
| Tenor |
400 days |
24 months |
36 months |
60 months |
| Interest Payment |
N.A. (Since Cumulative) |
N.A. (Since Cumulative) |
N.A.( Since Cumulative) |
N.A. (Since Cumulative) |
| Amount on Maturity |
Rs 1116.13 |
Rs 1243.23 |
Rs 1395.54 |
Rs 1723.35 |
| Tax slabs (%) |
10.3 |
20.6 |
30.9 |
10.3 |
20.6 |
30.9 |
10.3 |
20.6 |
30.9 |
10.3 |
20.6 |
30.9 |
Effective Yield -
Pre Tax (%) |
10.55 |
10.55 |
10.55 |
11.48 |
11.48 |
11.48 |
11.74 |
11.74 |
11.74 |
11.49 |
11.49 |
11.49 |
| Post Tax Returns (%) |
9.46 |
8.38 |
7.30 |
10.37 |
9.23 |
8.08 |
10.64 |
9.52 |
8.38 |
10.51 |
9.50 |
8.44 |
(Source: Prospectus to the issue & PersonalFN Research)
| Options |
XI (Unsecured NCD) |
| Minimum Application |
Rs 10,000 |
| Face Value |
Rs 1,000 |
| In Multiples of |
Rs 1,000 |
| Tenor |
75 months |
| Interest Payment |
N.A. (Since Cumulative) |
| Amount on Maturity |
Rs 2000 |
| Tax slabs (%) |
10.3 |
20.6 |
30.9 |
Effective Yield -
Pre Tax (%) |
11.72 |
11.72 |
11.72 |
| Post Tax Returns (%) |
10.78 |
9.80 |
8.77 |
(Source: Prospectus to the issue & PersonalFN Research)
Well, after reading the details of the NCD (as provided above), there may be still some more questions popping up, which are answered hereunder:
- Will I get any tax benefit if I invest in these NCDs?
No, these NCDs do not entitle you to any tax benefit nor are these any “infrastructure bonds”.
- Is interest on these NCDs Tax Free?
No, the interest on these NCDs is not tax free – it is chargeable to tax. The interest income will be taxed under “income from other sources”, and will be brought to tax at the respective income tax rates you fall under. However no tax will be deducted at source as these NCDs are issued in demat form and are listed on the exchange.
- What is the Tax Treatment on Capital Gains for these NCDs?
If you happen to sell these NCDs before 365 days, you will have to pay short term capital gain tax (as applicable to you as per your tax slab) arising on the profit. Provisions of long term capital gain tax will be applicable for any sale of securities after 365 days. Any long term capital gain on these securities will be taxable @ 10% without indexation benefits or 20% with indexation benefits.
- Can a minor apply to these NCDs?
Yes, a minor can apply for these NCDs, but only and only through a guardian.
- Can one apply in joint names?
Yes, one may apply in a joint name. However, the demat account will also be required to be held in joint name and the order of applicant shall be the same as appearing in the demat account. Moreover, all payments will be made out in favour of the first applicant as well as all communications will be addressed to the first named applicant whose name appears in the application form and at the address mentioned therein.
- Who will get the interest in case of joint application?
In case of joint application, interest will be accounted to the first holder only.
- My demat account is in joint name, but I want to apply is a single name?
In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do.
- If I'm an NRI can I invest in these NCDs?
No, NRIs are not eligible to invest in these NCDs.
- Is there a lock-in period while investing?
No. There is no lock-in period for these NCDs. In terms of providing liquidity, these NCDs are proposed to be listed on the Bombay Stock Exchange.
- In whose favour the cheque is to be made?
Cheques/Drafts have to be made in the favour of “Escrow Account Muthoot Finance NCD Public Issue” and crossed “A/C PAYEE ONLY”
OUR VIEW:
PersonalFN believes that the yields on this investment opportunity offered by MFL are attractive. The credit rating too, allotted to the issue is stable “[ICRA]AA-/Stable” by ICRA). Minimum ticket size has purposefully been kept low at Rs 10,000 to encourage the retail participation. Capital adequacy ratio also looks robust at 23.76% (against the 15% prescribed by RBI) as on December 31, 2013. Net NPA (Net Non-Performing Assets) on Gross Retail Loans constituted 1.67% in the 3rd quarter of the financial year 2013-14 (Q3 FY 2014) (a rise from the Q2 FY 2014 figure, 1.62%).
However, in the recent times the Government has been apprehensive of large gold imports by the country and as such to impede the import of gold, the import duty has been raised to 10% from the earlier 2% at the beginning of the year 2013. But after prescribing a loan-to-value ratio at 60%, the RBI has recently increased the same to 75% vide a notification; which in our view would thrust the business of gold loan NBFCs such as MFL.
NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50% or more of their financial assets) will be required to maintain a minimum Tier l capital of 12% by April 01, 2014. And since, NBFCs do not have restrictions like liquidity reserves and cash reserves; they (NBFC) are exposed to risk arising from depreciation in gold prices or liquidity risks. Thus, investors in NCDs issued by such NBFCs too, are exposed to such risks. Moreover, MFL might suffer from funding constraints due to the recent regulatory restrictions placed by the central bank on private placement of NCDs by NBFCs. Additional funding might also grow at a sluggish pace owing to the risks in this sector.
Thus taking into consideration a holistic view, we believe that investors who wish to invest in these NCDs can opt for Secured NCDs with a relatively shorter tenure of 12-24 months, rather than investing for tenure above 24 months, depending upon their investment holding capacity. One can choose between interest payout option and cumulative option therein, depending upon cash flow requirements.
In case you wish to invest in the above instrument, you can email us at info@personalfn.com or contact us on 022-6136 1200
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