Muthoot Fincorp NCD offers 10.2% yield; should you invest?

Muthoot Fincorp, the NBFC arm of the Muthoot Pappachan Group, has announced the public issue of secured and unsecured non-convertible debentures (NCDs) with effective yield ranging from 8.57% to 10.19% per annum. This is the 11th debt offer from the company since July 2014. The last offer was in April 2021. The issue opens on September 30, 2021, and will close on October 26, 2021.

Muthoot Fincorp provides retail loan products, primarily comprising of gold loans. It is a prominent gold loan player, with its gold loan portfolio comprising approximately 36.67 lakhs loan accounts, as of March 31, 2021. As of June 30, 2021, the company operated out of 3,659 branches located across 24 states, and employed 16,855 employees.

NCDs are debentures that cannot be converted into equity shares at the time of maturity. They are classified as secured and unsecured. Secured NCDs have an advantage over unsecured NCDs at the time of liquidation but they carry a lower rate of interest compared to unsecured ones.

NCD Details

There are 9 series of NCDs having tenure from 27 to 87 months with monthly or cumulative interest payment options. The face value of NCD is Rs 1,000 each, with a base issue size of Rs 200 crore, with a greenshoe option to retain oversubscription of Rs 200 crore.

Financials

The core business of the company is the disbursement of gold loans, which are typically small-ticket loans secured by the pledge of gold jewellery. As of March 31, 2021, the company had approximately 36.67 lakh gold loan accounts, aggregating to Rs 18,057.13 crore which comprised 96.62% of our total loan portfolio. For fiscal 2021, fiscal 2020 and fiscal 2019 revenues from the gold loan business constituted 93.60%,84.37% and 82.86 % of total income on a standalone basis, respectively.

Moreover, the company’s consolidated profits were 397.2 crores, 257.9 crores and Rs 372.6 crores for the financial years 2021, 2020 and 2019, respectively.

Credit rating

This offer is rated as CRISIL/A+ Stable by CRISIL. The lead manager is SMC Capitals Ltd. Integrated Registry Management Services is the registrar to the issue and Vardhman Trusteeship is the debenture trustee.

Liquidity

The NCDs will be listed on BSE and investors can apply for NCDs only in dematerialized form.

Taxability

Interest income will be charged to tax as “Income from Other Sources” at the rates applicable to the investor. If sold before maturity within one year of buying then short term capital gain tax is levied, which is taxed according to the marginal tax rate. If sold after a year, 10 % long term capital gain tax is levied without indexation.

What should investors do?

The NCDs offers a high-interest rate up to 9.75% with yield working out to 10.2%. Considering the credit rating of A+ by CRISIL  investors with a higher risk appetite can invest from a returns perspective after considering post-tax returns. Unsecured NCDs can be avoided because of the higher risks they carry.