Muthoot Finance Ltd NCD: Is it a worthy investment proposition?
Sep 22, 2012

Company Overview

Muthoot Finance Limited (MFL) is a non-deposit taking Non-Banking Financial Corporation (NBFC) headquartered in Kerala. Company has the long history of 72 years in the gold financing business. As of March 31, 2012, MFL is the largest gold financing company in India in terms of loan assets under management as per IMaCS Research & Analytics Industry Reports, Gold Loans Market in India, 2009 (IMaCS Industry Report, (2010 Update)). The company has a branch network of 3,780, spread across 20 states and 4 Union Territories as on June 30, 2012. The total employee strength of the company is 25,103 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 99.12% for the year ended March 31, 2012. 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 355.7 crore in March 2008 to Rs 4,515.7 crore in March 2012. Gross retail loan assets under management stood at Rs 24,673.6 crore as on March 31, 2012.

Company has been expanding its business fast in a last few years, which is clear from the revenue growth recorded by the company. Thus to finance various activities such as lending and investments, company is raising money through issuance of secured 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 of NCDs aggregating to Rs 250 crore with an option to retain over-subscription up to Rs 250 crore for issuance of additional NCDs, thus taking the total worth Rs 500 crore.
Rating	'CRISIL AA-' by CRISIL & '[ICRA] AA-' by ICRA
Security	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.
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 Option II: 36 months Option III: 60 months Option IV: 60 months Option V: 72 months
Coupon rate	Option I: 11.50% p.a. for category I, II and III investors Option II: 11.75% p.a. for category I, II and III investors Option III:11.75% p.a. for category I, II and III investors Option IV: 12.00% p.a. for category I, II and III investors Option V: 12.25% p.a. for category I, II and III investors
Trustee	IDBI Trusteeship Services Limited
Listing	BSE and NSE
Depository	National Securities Depository Limited and Central Depository Services Limited
Registrars	Link In time India Private Limited
Issuance	Physical and Demat form only; NCDs issued under Option V will be compulsorily allotted in dematerialised form
Issue Open Date	September 17, 2012
Issue Close Date	October 05, 2012
Deemed Date of Allotment	The Deemed Date of Allotment shall be the date as decided by the Board, or the NCD Public Issue Committee, and as mentioned on the Allotment Advice.
Eligible Investors
Category I	Public financial institutions, statutory corporations, commercial banks, cooperative banks and RRBs which are authorised to invest in the NCDs; Provident funds, pension funds, superannuation funds and gratuity funds, which are authorised to invest in the NCDs; Venture Capital Funds registered with SEBI; Insurance Companies; State industrial development corporations; Insurance funds set up and managed by the army, navy, or air force of the Union of India; Insurance funds set up and managed by the Department of Posts, the Union of India; National Investment Fund; and Mutual Funds
Category II	Companies; bodies corporate and societies registered under the applicable laws in India and authorised to invest in the NCDs; Public/private charitable/religious trusts which are authorised to invest in the NCDs; Scientific and/or industrial research organisations, which are authorised to invest in the NCDs; Partnership firms in the name of the partners; Limited liability partnerships formed and registered under the provisions of the Limited Liability Partnership Act, 2008; and Resident Indian individuals and Hindu Undivided Families through the Karta applying for NCDs aggregating to a value exceeding Rs 500,000, across all series of NCDs, (Option I and/ or Option II and/ or Option III and/or Option IV and/ or Option V)
Category III	Resident Indian individuals and Hindu Undivided Families through the Kartaapplying for NCDs aggregating to a value not more than Rs 500,000, across allseries of NCDs (Option I and/or Option II and/or Option III and/or Option IV and/ or Option V)

Note: PAN card is mandatory for subscribing to these NCDs. A self-attested copy shall be enclosed along with the application form.
Investors (across all categories) will also have the following options available at the time of subscribing to the issue:

Series	I			II			III			IV			V
Minimum Application / Face Value	Rs 10,000			Rs 10,000			Rs 10,000			Rs 10,000			Rs 10,000
In Multiples of	Rs 1,000			Rs 1,000			Rs 1,000			Rs 1,000			Rs 1,000
Tenor	24 months			36 months			60 months			60 months			72 months
Interest Payment	Annual			Annual			Monthly			Annual			N.A. (Since cumulative)
Coupon	11.50% per annum			11.75% per annum			11.75% per annum			12.00% per annum			N.A.
Yield on Redemption	11.50%			11.75%			12.40%			12.00%			12.25%
Tax slabs (%)	10.30	20.60	30.90	10.30	20.60	30.90	10.30	20.60	30.90	10.30	20.60	30.90	10.30	20.60	30.90
Effective Yield - Pre Tax (%)	11.50	11.50	11.50	11.75	11.75	11.75	11.75	11.75	11.75	12.00	12.00	12.00	12.25	12.25	12.25
Post Tax Returns (%)	10.30	9.12	7.93	10.53	9.32	8.11	11.06	9.73	8.42	10.75	9.52	8.28	11.25	10.22	9.14

(Source: Muthoot Finance Limited, 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", which make you eligible for an additional tax deduction under section 80 CCF.
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 (@ 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 National Stock Exchange and 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:

In our view the yields on investment offered by MFL are attractive. The credit rating too, allotted to the issue is stable (‘CRISIL AA-/Stable’ by CRISIL and ‘ICRA AA-/Stable’ by ICRA). Minimum ticket size has purposefully been kept low at Rs 5,000 to encourage the retail participation. Capital adequacy ratio also looks robust at 18.3% (against the 15% prescribed by RBI). Net NPA (Net Non-Performing Assets) constituted 0.57% (a little above from the March 31, 2011 figure, 0.33%) of the total loan book as on March 31, 2012, which is fairly low. Lower net NPA, indicates better sound health of the company, and signals that the company has been cautious over the quality of loans.

However, recently 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 4% from the earlier 2%. Moreover, even the RBI has reduced the loan to value ratio for NBFC’s engaged in lending against gold business to 60%, citing the brisk pace at which these NBFCs are lending against physical gold. 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.

Thus taking into consideration a holistic view, we believe that investors who wish to invest in these NCDs can opt for a relatively shorter tenure of 36 months rather than investing for tenure above 36 months. However, if an investor has a higher risk appetite than he or she can opt for the option which provides the highest yield (over here it is Option V).

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