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Sunday, August 21, 2011

Muthoot Finance ltd. NCD analysis Report

Muthoot Finance Limited NCD Review
Issue Highlights
Issue Size: Rs. 1000 crore (Inclusive of the  green shoe option of Rs. 500 crore)
Rating
·         CRISIL: AA-/Stable
·         ICRA: AA-(Stable)
Listing: BSE & NSE
Face Value: Rs. 1000 Rs.
Issue Price: Rs. 1000 Rs.
Issue Period: 23/8/2011- 5/9/2011
Issuance: Necessarily in Dematerialized form
Allocation: on first come first serve basis
Who Can Apply

   Category 1: Financial Institutions, Various Banks, Various Funds, Insurance Companies
   Category 2: Companies, Corporate Bodies, Authorized Trusts, I&S Research Organizations, HUF, Individuals, Partnership Firms
   Category 3: HUF & Individuals Applying for NCDs aggregating not more than Rs. 5,00,000

Instrument Details
Options
1
2
3

Interest Payment
Annually
Annually
Annually

Minimum Application
5 NCDs (5,000 Rs.) either taken individually or collectively
In multiples of
1 NCD (1,000 Rs.)
1 NCD (1,000 Rs.)
1 NCD (1,000 Rs.)

Interest rate- Category1
11.75 %
12%
12%

Interest rate- Category2
12%
12.25%
12.25%

Interest rate- Category3
12%
12.25%
12.25%

Tenor
24 months
36 months
60 months

Redemption Amount
Face value+ interest Accrued
Face value+ interest Accrued
Face value+ interest Accrued




Company Profile
MFL, is the largest gold loan financing company in India in terms of loan portfolio, which provides personal and business loans backed by gold and As of March 31,2010 total loan portfolio was 4.7 million loan accounts.MFL operates through its 2997 branches across 20 states and 2 union territories.MFL works as non deposit taking NBFC headquartered in Kerala. MFL issues Non Convertible Debentures (NCD) called “Muthoot Gold Bonds” on a private placement basis. Besides this, MFL also goes for bank and other debt instruments to raise funds. Gross NPA of MFL was below .5% for past 3 years.
Salient Features
·         No TDS shall be deducted
(According to Section 193 clause 9 of IT act, when security is in dematerialized form and listed on recognized exchanges in India, no deduction of tax shall take place)
·         Interest payment: on every anniversary of deemed date of allotment
·         Direct credit of interest to investors account for selected banks in selected cities via NECS, NEFT and RTGS

·         Redemption
             Option 1:  after 24 months
 Option2:   after 36 month
 Option 3:  after 60 months


Objects of the Issue:
·         to fund the various financing activities including lending and investments
·         issue expenses
·         loan repayments
·         working capital requirement
Comparison of NCDs with FDs
·     Unlike FDs no quarterly/monthly interest payment option
·     Unlike FD, no interest compounding facility
·     Though NCDs are safe but being offered by private player, it is a tad riskier than the conventional PSU bank FDs

Strengths
(1) Market leader in Gold loan business in India with a strong presence in under-served rural and semi urban markets where large portion of population has limited access to credit.
(2) Operating history evolves over a period of 70 years.
(3) As loans are backed by gold as collateral minimum documentation is required and short turnaround time (TAT).
(4) Largest branch network among gold loan NBFCs with about 1925 branches.
(5) A1+ ranking by ICRA and P1+ ranking by CRISIL.
75% of loan portfolio comes from 4 South states viz. Karnataka, Andhra Pradesh, Kerala & Tamilnadu.
Threats
(1)Sharp fall in gold prices may result in more loan defaults.
(2) Adverse Govt. & RBI policies in future.
(3) Competition from few banks which provide gold loan at cheaper interest rates than NBFCs
Financial Analysis
Capital Adequacy Ratio: 15.82% (As on 31/3/2011)
Debt/Equity Ratio: 2.75 Times (indicative post issue figure)
Gross NPA: .29% (As on 31/3/2011)
        Interest Coverage Ratio: 1.73
     
       Inference
      MFL is a well managed company and loans given against gold are pretty secure with the gold as the collateral. Fundamentals of MFL are satisfactory and investors may invest some part of their debt allocation in this NCD.
     As gold loans are of tenure less than a year but this company is issuing NCDs for a period up to 5 years, which could cause asset-liability mismatch in future especially considering the higher coupon rates of this NCD; hence Investors are advised to opt for option 1 ( 24 months tenure) to be on safer side.
      Traditional investors should read the following post to understand the basis difference between FD’s and NCD’s.
       Disclaimer: Analysis is for the information purpose only. Though due diligence has been taken while preparing this report, analyst shall not be responsible for any error and shall not bear any financial liability to the users of the report.

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