Muthoot Finance’s Rs 500-crore NCD issue opens; Should you invest?

Muthoot Finance has hiked the interest rates payout by 0.35-0.50 percent compared with the last issue, which was launched in November 2022.

Gold loan non-banking finance company (NBFC) Muthoot Finance on February 8 launched the tranche V of its secured issue of non-convertible debentures (NCDs).

It has a base issue size of Rs 100 crore with an option to retain oversubscription up to Rs 400 crore aggregating up to a tranche limit of Rs 500 crore.

Muthoot Finance has hiked the interest rates by 0.35-0.50 percent compared with the last issue, which was launched in November 2022.

The issue

There are seven investment options for the NCDs with monthly or annual interest payment frequency or redemption payments on maturity with interest rates ranging from 8.25 percent per annum to 8.60 percent per annum for individual investors.

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The NCDs have been rated AA+ with a stable outlook by ICRA Ltd and are proposed to be listed on BSE and the allotment will be on a first-come-first-serve basis.

About 75 percent of the net proceeds raised through this tranche will be utilised for lending and the rest for general corporate purposes.

The minimum application in the NCD issue will be Rs 10,000 with a face value of Rs 1,000 each.

Speaking on their 30th NCD issue, George Alexander Muthoot, Managing Director, Muthoot Finance, said, “In the light of the recent interest rate hikes by RBI, we have also increased the interest rates in our 30th NCD issue by 0.50 percent, 0.40 percent, 0.35 percent per annum for tenors of two, three and five years, respectively. We have allocated 90 percent of the issue for retail and high networth individual investors who will be getting 0.50 percent per annum more than the interest rate applicable for institutions and corporates.”

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What’s hot?

The AA+ rating of the NCDs by ICRA indicates a high degree of safety regarding the timely servicing of financial obligations.

Further, in terms of financials, Muthoot Finance is a fairly stable company and its gold loan book has more than doubled over the last five years to Rs 56,177 crore as of June 2022.

As per ICRA, the agency could change the outlook or upgrade the rating if Muthoot Finance sustains a comfortable overall asset quality and capital profile over the medium to long term. A track record of good performance in the non-gold segments and improvement in geographical diversity would also positively impact the rating.

What’s not?

ICRA said that Muthoot Finance’s consolidated portfolio is currently concentrated towards gold loans, comprising 89 percent of the loan book while microfinance, affordable housing and vehicle finance accounted for 7.4 percent, 2.3 percent and 0.3 percent, respectively, as on June 30, 2022.

Gold loans are typically considered among the riskiest as families pledge gold only as a measure of last resort. However, a decent credit rating and the secured nature of this NCD give a bit of comfort.
Further, the company’s operations are largely concentrated in South India, which constituted 60 percent of its total branch network and 50 percent of its total loan portfolio.

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In terms of credit quality, the issue isn’t rated AAA, which is considered to have the highest degree of safety.

Moreover, while the NCD offers 8.25-8.60 percent for periods of two to five years, certain banks currently are also offering interest rates on their fixed deposits (FDs) in the range of 7-7.5 percent for similar periods.

The interest rate payout in the case of FDs can go up to 8 percent for senior citizens.

Also, keep in mind that FDs are much more liquid compared to NCDs.

What should investors do?

“The interest rates are not that attractive as some banks are now offering some 8 percent on their fixed deposits. Further, even Indore Municipal Corporation’s upcoming public NCD are offering similar returns,” said Vikram Dalal, managing director, Synergee Capital Services.

Dalal added that while the returns from Muthoot Finance’s NCD issue are not so attractive, investors can look at the issue if someone is looking at regular income. This should not be your first choice of a debt instrument, though.

As per experts any kind of capital, especially in debt allocation is best deployed in multiple instruments.

Muthoot Finance’s NCD issue opened on February 8, 2023 and will close on March 3, with an option of early closure.