Muthoot Finance NCD – Should you invest?

Muthoot Finance NCDMuthoot Finance – India largest gold loan company has come out with NCD (non-convertible debentures) offering 13 – 13.25% interest in 2, 3 and 5 years tenors. It also has a product which doubles your money in 66 months offering a pre-tax yield of 13.46 per cent.

Salient Features: Muthoot Finance NCD

  • These NCDs are available only in dematerialized form and can be bought individually or jointly
  • The NCDs are available for four maturity periods – two years, three years, five years and five-and-a-half years
  • The interest would be paid annually, except for NCDs with a maturity of five-and-a- half years for which the payment option is cumulative
  • This NCD would be listed on BSE only
  • The NCD issue doesn’t have the call or put options
  • Minimum Investment: Rs 5,000
  • Issue closes on January 7, 2012

Interest Rate and post tax return Details: Muthoot Finance NCD

Options I II III IV
Annual Interest Payout Cumulative Scheme
Investment Amount 1,000 1,000 1,000 1,000
Interest Rate 13.00% 13.25% 13.25% 13.43% (Annual Yield)
Tenor (Months) 24 36 60 66
Redemption Amount 1,000 1,000 1,000 2,000
Post Tax Return
10.3% Tax Bracket 11.66% 11.89% 11.89% 12.05%
20.6% Tax Bracket 10.32% 10.52% 10.52% 10.66%
30.9% Tax Bracket 8.98% 9.16% 9.16% 9.28%

Ratings:

Muthoot NCDs have been rated AA-(stable) by ICRA Ltd and AA-/stable by Crisil Ltd. The ratings indicate very low credit risk as well as a high probability of timely interest payment.

Company Details: Muthoot Finance

Muthoot Finance is on a strong growth path and its profit after tax in the first six months of the current fiscal year stood at `406 crore compared with a profit of `494 crore during the whole of FY11. The capital adequacy ratio of the company stands at 18.24%, much above the regulatory requirement of 15%.

However, the increasing level of non-performing asset (NPAs) is a problem area. The gross NPAs of the company were 0.59% in the first six months of FY12, up from 0.29% in entire FY11. While all its loans are securitized, a substantial correction in gold pric- es may adversely affect the loan recovery process, which in turn will hit the company’s financials.

Should you invest in Muthoot Finance NCD?

We recommend investing in the present Muthoot Finance NCD as this offers high interest rates for the risk it carries.  The only thing to keep in mind is you might need to hold the bonds till maturity due to low liquidity of the same on stock exchanges.

Hindu Business Line Recommendation:

Investors can consider subscribing to Muthoot Finance’s secured NCDs, in light of the very attractive interest rates. However, investors should avoid exposing too much of their debt portfolio to this bond, given the risks inherent to the business. We think the company’s reliance on a single lending product, namely gold loans, carries risks. The rates on the two year option are better than that on deposits from companies with similar credit ratings such as Shriram Transport (9.75 per cent), Dewan Housing Finance (10.5 per cent) and Mahindra Finance (10 per cent).

Mint Recommendation:

With the market expecting a reversal of the interest rate cycle soon, the Muthoot NCD is likely to be the last one offering such lucrative returns. Moreover, substantial correction in gold prices is unlikely anytime soon, which bodes well for the company.

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8 thoughts on “Muthoot Finance NCD – Should you invest?

  1. kamal aneja says:

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  2. I need short term plan(2,3 or 5 years).I need to know which company is giving maximum interest and security.i need maximum returns after end of the term.

    • There’s nothing called low risk and high return. There is always a compromise between risk and return. I would recomend you to invest in direct stocks if you can pick it yourself and if not you should invest in good equity based mutual fund. For 2-3 years you should look to Bank FD if you are looking for low risk, FMPs & Debt Mutual Funds for medium risk and Company FD/ NCDs for relatively higher risk. In company FD you can expect maximum return of 12.5% per annum. Click here for company FDs listed on this blog.

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