Should you invest in Muthoot Fincorp's NCD?

Muthoot Fincorp Limited (MFL) – Flagship Company of the Muthoot Pappachan Group is a finance company catering to the financial needs of retail and institutional customers. Established in 1997, it is registered with the Reserve Bank of India (RBI) as a systemically important non-deposit taking Non-Banking Finance Company (NBFC) with a paid up capital of 62.5 crores and a Net Owned Fund of 461.6 crores as on 31.03.2011.


MFL has its focus on providing a host of financial services through a wide network of over 1,254 branches pan India. It has a diverse mix of retail offerings in the areas of consumer loan products and investment advisory services. These include Gold loans, Home loans, Auto loans, Business loans, Loans against Property, Investment products and Advisory Services.


The business model


Muthoot Fincorp Ltd (MFL) is part of the Muthoot Capital Services Ltd (MCSL) is controlled by the Muthoot Pappachan group. Muthoot Pappachan group's main business is financing against gold. Gold financing, contributes over 95% of the MFL-MCSL combine's total income. Apart from the above, MFL also engages in extending loans for two-wheelers, business, and micro-finance, but the income from these segments is niche over the medium term.


Moreover, the MFL-MSCL operations are highly concentrated in Kerala and Tamil Nadu; with both these states accounting for about 85% of its total AUM (Assets Under Management).


Thus, in order to augment the working capital requirement of the company and for general corporate purposes, MFL proposes to mobilise through private placement of unlisted secured Non Convertible Redeemable Debentures (NCD) of face value of 10,000 each at par aggregating upto 25 Crores with a greenshoe option of 10 crores.


The details of the offering (NCD) are as follows:

*The issuer would have the right to pre-close the issue or extend the closing date by giving one day notice to the arranger.
Note: PAN card is mandatory for subscribing to these bonds. A self attested copy shall be enclosed along with the application form.


Investors’ will have the only under-mentioned option available, wherein the interest would be defrayed to them on an annual basis, thus enabling them to enjoy a pre-tax yield of 11.75% at maturity.


(Source: Muthoot Fincorp Ltd. & PersonalFN Research)


Taxation of Non-Convertible Debentures:

It is noteworthy that your investment in MFL’s NCD will not make it eligible for tax deduction under chapter VI-A of the Income Tax Act, 1961. Also, the interest received from debentures will be deducted at source by the company (MFL). However, if you are desirous of claiming exemption from deduction of income tax at source on the interest payable on debentures you need to submit tax exemption certificate/ document, as per Section 193 of the Income Tax Act, 1961, if any, at the Registered Office of the Company, at least 45 days before the due date of payment.


OUR VIEW:

In our opinion though the interest rates offered are lucrative along with the rating being “stable”, one needs to check the post tax yield generated by the debentures. Moreover, the investment does not incentivise any tax savings.


Moreover, the following factors dither a big ticket investment of 1,00,000 (minimum investment amount)


  • Debt-Equity ratio of 5.21

  • MFL operations being highly concentrated in Kerala and Tamil Nadu

  • Business model being skewed towards one asset class – gold

  • Applicability of Kerala State Money Lenders Act, 1958 having significant impact on the operations of NBFC.

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