NCD Public Issue – NBFC Muthoot Finance

Introduction:

Premier gold-loan NBFC Muthoot Finance has entered the debt capital market with a public issue of secured redeemable non-convertible debentures (NCDs) of face value Rs. 1,000 each, to raise Rs. 250 crore with an option to retain another Rs 250 crore, taking the total fund raising to Rs. 500 crore.

Issue Details:

The first-cum-first-serve issue has opened on 17th September and closes on 5th October 2012, with an option in company’s hands to either close the issue earlier or extend the closing. Minimum application amount is Rs 10,000, and in multiples of Rs, 1,000 thereof.

Rating: ‘AA-/Stable’ by CRISIL and ICRA indicating high degree of safety for timely servicing of financial obligations

Listing: To be listed on NSE and BSE with one NCD comprising a trading lot. NCDs in Series I to IV would be issued both in physical and demat form, while Series V NCD will be issued compulsorily in demat form.

What’s on offer: The NCD issue has 5 investment options as under:

Particulars

Series I

Series II

Series III

Series IV

Series V

Frequency Of Interest Payment

Annual

Annual

Monthly

Annual

On Redemption*

Tenure

2 Years

3 Years

5 Years

5 Years

6 Years

Coupon Rate {%pa}

11.50%

11.75%

11.75%

12.00%

NA

Effective Yield {%pa}

11.50%

11.75%

12.40%

12.00%

12.25%*

*Redemption amount of Rs. 2,000 per NCD

Company Background:

Muthoot Finance, India’s largest gold loan company in terms of loan portfolio and branch network, with gold loan portfolio of Rs. 23,336 crore as of 30th June 2012, comprising more than 60 lakh gold loan accounts served through a network of 3,780 branches. For FY12, company earned revenue of Rs. 4,537 crore and net profit of Rs. 892 crore. Company’s net worth stands at Rs. 3,172 crore as of 30th June 2012, with CAR of 19.42%. For Q1FY13, its revenue rose to Rs. 1,287 crore and net profit to Rs. 246 crore. Thus, the company enjoys sound financial position along with a healthy balance sheet. Funds raised via the NCD issue will be used in regular financing activities, investments and to repay existing liabilities.

Rate of Return:

Over 12% interest rate on 5 year NCDs with annual interest payment (Series III and IV) seems attractive for retail investment in fixed income securities, given the longer tenure of the instrument, ensuring that capital is earning higher rate. Also, Series V is an equally good option, due to doubling of investment in 6 years time. Neither any bank nor any company (with credible rating) is offering interest rates in double digit on fixed deposits of 5 years and above.

Previous NCD Issue:

Company had issued NCDs three times previously (Sep 2011, Jan 20112, Apr 2012). The 5 year NCDs from these previous issues are currently trading at yields of 12.12% to 13.41%, with average of 12.65%. However, these listed bonds have very low liquidity.

Conclusion:

Tax-free HUDCO bonds are currently trading at yields of about 7.6% on BSE. At 12% pa, Muthoot’s NCDs lead to effective post-tax return of 8.29%, assuming highest tax bracket of 30.90%. Hence, ignoring the time frame, these NCDs fare favourably against the listed tax-free bonds.

Recommendation:

The current NCD issue is attractive for retail investors as it offers high ‘fixed returns’ for a long-term duration of 5 and 6 years. It fares better than bank FD, company fixed deposits and listed tax free bonds with respect to rate of return. Those looking for diversified investment options can go for the issue with 5 or 6 years tenure i.e. Series III, IV or V, based on an individual’s cash flow needs.

Public Issue – Secured Redeemable Non-Convertible Debentures from SREI Infrastructure Finance

Introduction:

SREI Infrastructure Finance, 23year old listed NBFC, is entering the debt capital market with a public issue of secured redeemable non-convertible debentures (NCD) of face value Rs. 1,000 each to raise Rs. 75 crore with an option to retain another Rs 75 crore, taking the total fund raising to Rs. 150 crore.

Issue Details:

The first-cum-first serve issue opens on 20th September and closes on 25th October 2012, with an option in company’s hands to either close the issue earlier or extend the closing. Minimum application amount is Rs. 1 00,000 for series I and II while it is Rs 10,000 for series III and IV, and in multiples of Rs, 1,000 thereof across all series.

Rating: ‘AA’ by CARE and BRICKWORK indicating high degree of safety for timely servicing of financial obligations

Listing: To be listed on BSE with one NCD comprising a trading lot. NCD would be issued both in demat and physical (for individual investors) form.

What’s on offer: The 7 year NCD issue has 4 investment options as under:

Particulars

Series I

Series II

Series III

Series IV

Frequency On Interest  Payment

Monthly

Quarterly

Annual

Cumulative

Investors who can Apply

Individual/Huf

Individual/Huf

All

All

Tenure

7 Years

7 Years

7 Years

7 Years

Coupon Rate {% P.A}

Individual Investor

NA

NA

10.30%

NA

Non-Individual Investor

9.84%

9.92%

10.25%

NA

Effective Yield {% P.A}

Individual Investor

NA

NA

10.30%

10.25%

Non-Individual Investor

10.30%

10.30%

10.25%

10.41%

Put Option

After 5 Years

After 5 Years

After 5 Years Only For Individuals

After 5 Years Only For Individuals

Redemption Amount {Per NCD}
Individual Investor

Face Value + Accrued Interest

Face Value + Accrued Interest

Face Value + Accrued Interest

Rs. 2,000 {RS. 1,633} On Put

Non-Individual Investor

Rs.  1,980

Company Background:

SREI Infrastructure Finance provides financial products and services to its about 30,000 customers engaged in infrastructure development and construction. For FY12, consolidated total income stood at Rs. 2,446 crore with PAT of Rs. 123 crore. For Q1FY13, consolidated total income was Rs. 756 crore and PAT Rs. 22 crore. As of 30th June 2012, company had networth of Rs. 3,200 crore, on equity of Rs. 503 crore, leading to BVPS of Rs. 64. Its asset quality indicates gross NPAs of Rs. 110 crore and net NPAs of Rs. 99 crore, translating to net NPAs ratio of 0.78%.

Rate of Return: Not very attractive vis-à-vis offer by other companies on their secured NCDs like Religare and Muthoot, which enjoy credit rating one notch above SREI Infra.

Recommendation:

The current NCD issue is not attractive as its effective yields are low, versus other existing options, currently underway. Only positive is that NCDs have a longer tenure of 7 years as against 5-6 years by other issuers. One can give this a miss!