In the current scenario when the interest rate on bank fixed deposits is historically low, many investors might be considering investing in the Muthoot Fincorp NCD(Non-Convertible Debenture) which is offering a mouth-watering effective annual yield of up to 9.37%. The company has proposed to raise Rs.200 crore through this NCD for meeting its working capital requirement (75%) and for other general corporate purposes, with an option to retain over-subscription up to Rs. 200 crores, aggregating up to Rs. 400 crore. The issue is open for subscription from 5th January 2022 to 28th January 2022. The minimum subscription is 10 NCD of Rs. 1000 each and in multiples of one NCD. Thus the minimum amount for investment is Rs. 10,000.
Terms & Conditions of NCD
The company has provided two options for receiving the interest:
Monthly interest and cumulative interest at the time of redemption of NCD.
The NCDs are offered for five different tenures- 27 months, 38 months, 60 months, 72 months, and 96 months. Thus, an investor has got 10 options in this offer of NCD to choose from. In monthly interest mode, the Coupon per annum ranges from 8% to 9% depending on the tenure. The effective yield per annum is quoted as 8.30% to 9.37% depending upon the tenor and interest payout option.
There are no call or put options on this NCD which means that the issuer can not call back the NCD if the interest rate goes down and also the NCD holders can not put back the NCD to the issuer in case of the interest rate goes up.
The details as mentioned in the company’s prospectus are as follows:
Specific Terms of NCDs – Interest and Payment of Interest
Monthly interest payment options
The investors will receive the monthly interest under Options I, II, III, IV, and V at the following rates of interest in connection with the relevant categories of Debenture holders, on the amount outstanding from time to time, commencing from the Deemed Date of Allotment of NCDs:
The relevant interest will be calculated from the first day till the last date of every month on an actual/actual basis during the tenor of such NCDs and paid on the first day of every subsequent month.
Cumulative interest payment options
The investors who select the option VI, VII, VIII, IX and X of the NCDs shall receive the maturity amount as mentioned below (for every NCD with face value of Rs. 1000):
Taxation of NCD
An investor has to pay the tax on interest received (in case of monthly interest NCD) or on accrued interest the cumulative interest at rate applicable to his income tax bracket. If such NCDs are sold through the Exchange in the secondary market within one year from purchase date, the investor has to pay the short term capital gain tax as applicable to his income tax bracket and if sold after one year of purchase, the indexation benefit will be applicable on the realized long term capital gain.
About the Company and its Business
Muthoot Fincorp Limited (MFL) was set up in 1997 as a non deposit taking NBFC (Non-Banking Finance Company) and is registered with Reserve Bank of India (RBI). The company is headquartered in Kerala. The company has three subsidiaries:
Muthoot Housing Finance Company Limited providing affordable housing loans; and
Muthoot Microfin Limited, providing micro-credit facility to aspiring women entrepreneurs;
Muthoot Pappachan Technologies Private Limited (MPT) provides a Consulting-led Integrated portfolio of Information Technology (IT) and IT-enabled services.
The company is engaged in lending against gold jewellery and ornaments. The company is part of Muthoot Pappachan Group (MPG) which is engaged in diverse business interests such as hospitality, financial services, inflight catering, infrastructure for information technology, automobile sales and services, and real estate. The company distributes many other products such as mutual funds, life, and non-life insurance and also has a foreign exchange and money-transfer facility.
The company on a standalone basis as of 30th September 2021
The company has 3658 branches across 24 states in India
Gold loan business contributed to 94.39% of total income on a standalone basis.
The gross loans under management was Rs. 16,494 crore.
The Company held 51.41 tonnes of gold jewellery as a security for gold loans
Capital Adequacy Ratio (CAR) was 19.39% compared to RBI stipulated minimum requirement of 15%
Gross NPA and net NPA was 2.87% and 1.64% respectively.
Group Company as a whole as of 30th September 2021
Gold loan portfolio of Rs 15,881 crore accounted for around 66% of the group’s overall asset under management (AUM).
MFL’s gold loan business grew at a steady rate of 21% in the previous fiscal.
The non-gold loan portfolio formed around 34% of the total MPG portfolio. Out of this, the MML (microfinance) business accounted for Rs 4,769 crore AUM as of September 30, 2021, while the AUM of the vehicle and housing finance stood at Rs 1,992 crore and Rs 1,250 crore, respectively.
Due to Covid-19, the non-gold portfolio has faced asset quality challenges. The management decided to curtail further disbursements due to which there was no growth in the microfinance business and a decline in the vehicle finance business.
Credit Rating of Muthoot Fincorp NCD
The Credit rating of Muthoot Fincorp NCD of Rs. 400 crore is carried out by CRISIL, which has, vide its letter dated 13.12.2021, rated the NCD as ‘A+/Stable’ as mentioned in their report below:
“CRISIL Ratings has, after due consideration, Assigned a CRISIL A+/Stable (pronounced as CRISIL A plus rating with Stable outlook) rating on the captioned debt instrument. Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.”
CRISIL specified that the ratings are further strengthened by promoters’ extensive experience in the loan-against-gold jewellery business, its established market position in the gold business, and diversified product profile of MPG, healthy asset quality, and improving earnings profile in the gold loan segment. However, CRISIL noted that these strengths are partially offset by moderate capitalization, geographical concentration in the portfolio and potential challenges associated with non-gold loan segments.
Strength of the Company
The company has the following competitive strength which is causing the constant growth in the company’s business:
The Company has extensive experience, a strong brand image, and a track record in the Gold loans business across India. It is one of the largest NBFCs in India engaged primarily in the Gold loans business.
The company has a widespread Branch Network and a Strong Presence in South India.
The company is being run by an experienced senior management team and a skilled workforce.
The group has a presence in diverse business activities, the prime engine of growth being the gold lending business.
Risk factors to company’s future Growth
In NCD Prospectus, the company informed that there are potential internal and external risk factors which, if actually occur, the Company’s business, financial conditions, and results of operations could suffer and/or the Company’s ability to meet its obligations in respect of the secured NCDs could be affected. This will cause a decline in the value of the Company’s secured NCDs. The main risk factors are quoted as below:
Spread of COVID-19 pandemic: The nationwide lockdown impacted the company’s operations and financial condition. Consequently, redemption and disbursement of loan were also affected; as the borrower movement was restricted, few of them were unable to visit branches for servicing of loans, thus, there was spurt in overdues and NPA.
RBI Restriction on Current Account: Scheduled commercial banks and payment banks have been directed not to open and maintain current accounts for customers who have availed credit facilities in the form of cash credit (CC)/overdraft (OD) from the banking system. Implementation of the aforesaid direction without providing an alternate mechanism for financial institutions transacting with scheduled commercial banks and payment banks to withdraw and deposit cash may adversely affect the company’s business, results of operations and financial condition.
Real estate property acquisition: The Company’s credit profile may take an impact because of real estate property acquisition, since such acquisitions bring real estate sector risks.
Rise in borrowing cost and difficulty in accessing debt in a cost-effective manner. During FY 2019, the Indian economy witnessed defaults of debt repayments by large NBFC players. Such events heightened the investor focus around the health of the broader NBFC sector as well as their sources of liquidity. This has led to a crunch in liquidity available to certain NBFCs. Re-occurrence of similar events may affect the market sentiment towards NBFC sector and as a whole may affect the borrowing capability of the Company adversely.
Vulnerable to interest rate risk: The company provides loans at a fixed rate of Interest while we borrow funds on both fixed and floating rates. Volatility in interest rates can materially and adversely affect the company’s financial performance.
Credit Rating: The company’s ability to access capital also depends on its credit ratings. Any downgrade of our credit ratings would increase borrowing costs and constrain its access to capital and lending markets. This would negatively affect the company’s net interest margin and business.
Operational Risk: Since the company handles high volumes of cash and gold jewellery in a dispersed network of branches, it is exposed to operational risks, including employee negligence, fraud, petty theft, burglary and embezzlement, which could harm its operations and financial position.
Concentration Risk: The majority of the company’s branches are located in southern India, and any disruption or downturn in the economy in such states or any change in consumer preferences in that region could adversely affect the results of operations and financial condition of the company.
The Bottom Line-Should you invest?
Muthoot Fincorp is a major player in the Gold Loan segment in India, has a long history, and it is backed by experienced leadership. However, we need to keep in mind the various risk factors the company currently faces. Also, going by the examples of many NBFCs failing in a very short period of time (DHFL, IL&FS Financial Services, Srei, etc.), it is highly recommended that the investors assess their risk-taking capability before investing in any NCD. In such an investment, an investor is not only exposed to risk related to not receiving the interest income in time in case of financial stress in the company but also the probability of losing the capital if the company fails due to various risk factors as mentioned above.
As the Indian debt market is not yet fully developed and there is very little liquidity for various bonds/debentures on the secondary market, an investor may be exposed to liquidity risk and may not be able to sell the NCD in case of any urgency.
Also, at the time of any financial crisis, a low-rated NCD loses its value very fast as investors sell such NCD/bonds and move to government securities or higher rated bonds. This may lead to a loss in the market value of bonds/NCD.
As there are expectations of an increase in interest rate scenario, an investor should avoid the NCD which is in the medium to long term in nature. So, an investor should go only for Muthoot Fincorp NCD for 27 months.
A retired person or anyone who is dependent on interest income should first explore and diversify in other fixed income avenues such as Post Office Monthly Savings Schemes (MIS), Senior Citizen Savings Schemes, Bank FD, etc. to meet their regular income needs. After that, one can invest in the NCD just as a diversifier up to a maximum of 5% of the portfolio.
Instead of investing in the NCD of a single company, one should diversify in a number of companies’ NCD. Alternatively, one can opt for Liquid Fund, Overnight fund, Low duration and Short duration Funds of Mutual Fund schemes.
Always keep in mind that a lure of high return leads to higher risk. So, controlling the temptation of high yield is of utmost importance.
