Muthoot Finance NCD: High returns for matching risks

Muthoot Finance, for the third time this fiscal, has come up with a public issue of non-convertible debentures. The interest rates offered by these secured debentures are high given that there is expectation of decline in rates from June this year.

But the offer does carry some risk because of the company's concentration on the single business of gold-lending and the general fund crunch being faced by non-banking financial companies (NBFCs). Indeed, concerns about the rapidly growing gold-lending business have prompted greater regulatory intervention in recent times, pegging up risks.

Only investors with a higher risk appetite should invest and they would be well advised to restrict their investments in this offer to, say, 5 per cent of their portfolio. Those who have bought into previous debenture offers from Muthoot can skip this one. The company is offering 13 per cent for the two-year option and 13.25 per cent for the three- and five-year options. It is also offering a 66-month cumulative option with a yield-to-maturity of 13.44 per cent. The two-year debentures appear the best option to restrict risk.

The interest rate is around 2.5 percentage points higher than current market yields of AA-rated corporate debenture. But the credit rating of Muthoot Finance is a notch lower at AA- which indicates that the company is relatively more risky than AA and AA+ instruments. Muthoot Finance's incremental borrowing from banks and the market are at similar rates of 13-13.5 per cent.Investors should also note that there has been a huge surge in public offer of debentures by (NBFCs), with bank lending to this segment curtailed. Muthoot Finance alone raised Rs 1,150 crore in the last one year.

About the company

Muthoot Finance is the largest gold-loan company in the organised market. As of December last year, the company had Rs 22,690 crore in loan assets and held 132 tonnes of gold. The secured nature of lending (loan against gold), low loan-to-value (which provides cushion against correction in gold price) and high margins are key positives. The loans are also short-term; the companies borrowings are longer term.

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