Muthooth Finance Non-Convertible Debentures, both secured and unsecured, are open for subscription. With Interest rates still remaining high, companies are finding it good time to raise money from the public by offering higher rates. This company also has been raising money quite frequently primarily due to the nature of its business.
Let review about this NCD to understand the risk associated and the considerable investment options-
The Company
Muthooth Finance is majorly into Gold Loans which is almost 98% of the total business. The business of the company is very much concentrated in southern part of Indian but in recent times it has focused on spreading it other parts of the country. The company revenues (which comes from the interest income) has almost doubled in last two years. Thriving on this increase in income, the company has been expanding rapidly by opening branches across the country.
About NCD
The total size of the issue is Rs 300 crore which is closing on December 2, 2013. The offer is on first come first serve basis and may be extended or pre-closed based on the fulfillment of requirement. The primary objective of this money is to either repay existing liabilities or utilize it for the operational expenses which company has to bear due to heavy expansion.
The company is offering two types of bonds within this NCD-
1 Secured Redeemable- These bonds will be backed by security and investors holding these bonds will be preferred as and when claim by investors arises.
2. Unsecured Redeemable bonds- This bonds will not be backed by any security and so the claim in of these investors will be settled only after other investors have been paid.
The minimum application is of Rs 10000 and then in multiple of Rs 1000. The issue will get listed on BSE where it will be available for trading.
Interest Rates
The company is offering 12 options to the investors where the maximum rate is of 12.25% for 36 months payable monthly and 12.25% cumulative for 60 months. So effectively the money gets doubled when you invest it for 5 years. The unsecured NCD is of 72 months with a cumulative option.
Risk Factors
Following are the risk factors associated with the issue:
1. Interest Rate Risk- The business of the company is heavily dependent on the interest rates movement. On One side it borrows heavily to stay in the business and second it lends heavily to earn from the business. Both these can be affected for any adverse movement in the interest rates.
2. Default Risk- Although the credit rating of the company is on higher side, there is no denying that every private company has this risk associated with it. Since NBFCs do not have any regulatory restrictions for keeping any liquidity or cash reserves, for companies like Muthooth Finance which is heavily dependent on gold loan, the risk is higher. The adverse situation of gold prices can also lead to investors default forcing company to recover from the collateral, which may not meet the company funds requirement.
3. Government Control- Gold consumption has been illustrated as a big concern for our country and so there have been measures by the government. RBI has also specifically restricted NBFCs to provide loans only up to 60% of the value. Even bank have been advised to cut down exposure in Loans to such NBFCs. All these measures will impact the business of the company.
Thus, there are risk within this business which are present with the company and which investors will have to take into consideration.
Should you invest?
The rating of the company is good and the yields are quite attractive. But it's wiser to avoid taking a long term bet and a high exposure. If keen to invest for the yield, consider the short term Secured option.
The author is a Investment Adviser & CFP at JS Financial Advisors.
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