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 over 73 years in the gold financing business. The company has a branch network of 4,163 branches, spread across 20 states and 4 Union Territories as on June 30, 2013. 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 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 2,298.3 crore in March 2011 to Rs 5,364.1 crore in March 2013. Gross retail loan assets under management stood at Rs 26,386.8 crore as on March 31, 2013.

Company has been expanding its business fast in a 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 Secured and Unsecured 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 of Secured NCDs and Unsecured NCDs aggregating upto Rs 150 crore with an option to retain over-subscription up to Rs 150 crore for issuance of additional Secured NCDs and Unsecured NCDs aggregating to a total of upto 300 crore. The Unsecured NCDs will be in the nature of subordinate debt and will be eligible for Tier II capital
Rating	NCDs including Subordinate Debt '[ICRA] AA-/Negative' by ICRA Secured NCDs: 'CRISIL AA-/Negative' by CRISIL Unsecured NCDs (Subordinate Debt): 'CRISIL AA-/Negative' by CRISIL
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 Option II: 36 months Option III: 60 months Option IV: 24 months Option V: 36 months Option VI: 60 months Option VII: 400 days Option VIII: 24 months Option IX: 36 months Option X: 60 months Option XI: 72 months (Unsecured NCD)
Coupon rate (For all categories of Investors i.e. Category I, Category II, Category III)	Option I: 11.50% p.a. Option II: 12.00% p.a. Option III: 11.50% p.a. Option IV: 12.00% p.a. Option V: 12.25% p.a. Option VI: 12.00% 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 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	November 18, 2013
Issue Close Date	December 02, 2013
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.
Eligible Investors
Category I	Public financial institutions, statutory corporations, commercial banks, co-operative 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; and Limited liability partnerships formed and registered under the provisions of the Limited Liability Partnership Act, 2008 (No. 6 of 2009)
Category III	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: Draft prospectus & 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	11.50% per annum			12.00% 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 (%)	12.12	12.12	12.12	12.67	12.67	12.67	12.12	12.12	12.12
Post Tax Returns (%)	10.82	9.52	8.24	11.30	9.95	8.61	10.81	9.52	8.24

(Source: Draft prospectus & 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	12.00% per annum			12.25% per annum			12.00% 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 (%)	12.02	12.02	12.02	12.25	12.25	12.25	12.00	12.00	12.00
Post Tax Returns (%)	10.75	9.51	8.28	10.98	9.72	8.46	10.75	9.52	8.28

(Source: Draft prospectus & 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 1121.71			Rs 1254.40			Rs 1414.36			Rs 1762.34
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 (%)	11.05	11.05	11.05	12.01	12.01	12.01	12.24	12.24	12.24	11.99	11.99	11.99
Post Tax Returns (%)	9.92	8.78	7.65	10.82	9.64	8.43	11.10	9.94	8.75	10.98	9.92	8.83

(Source: Draft prospectus & PersonalFN Research)

Options	XI (Unsecured NCD)
Minimum Application	Rs 10,000
Face Value	Rs 1,000
In Multiples of	Rs 1,000
Tenor	72 months
Interest Payment	N.A. (Since Cumulative)
Amount on Maturity	Rs 2000
Tax slabs (%)	10.3	20.6	30.9
Effective Yield - Pre Tax (%)	12.24	12.24	12.24
Post Tax Returns (%)	11.26	10.23	9.15

(Source: Draft prospectus & 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 ('CRISIL AA-' by CRISIL and 'ICRA AA-' 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 20.77% (against the 15% prescribed by RBI) as on June 30, 2013. Net NPA (Net Non-Performing Assets) on Gross Retail Loans constituted 1.72% (a rise from the March 31, 2012 figure, 0.49%) as on March 31, 2013.

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. Moreover, the loan to value ratio for NBFC's engaged in lending against gold business has been maintained at 60% by the RBI, citing the brisk pace at which these NBFCs are lending against physical gold. 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 24 months, or at the most look at 36 months, since yields offered are attractive. 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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