Muthoot Finance And Religare Finvest Issue NCDs To Woo Investors

In the kind of volatile equity market that exists at present, it seems that non-convertible debentures (NCDs) are one of the favourites for both investors as well as for the companies issuing them. This is because an investor gets an attractive coupon rate while on the other hand the company is able to raise funds easily. Investors usually get a higher coupon rate of 200 to 300 basis points as compared to the regular fixed deposit held with a bank. Further, in the current higher interest rate environment NCDs offer a very attractive rate, thereby tempting investors to at least park here a portion of their portfolio. 

This is evident from the fact that the NCDs issued in recent times have received a very encouraging response from the investors.  In a short span of 15 to 20 days there have been around four to five companies that have raised funds from the market through the NCD route. It is estimated that around Rs 2,150 crore have been procured by the issuing companies in a short horizon of around a month or so.

It was all kick-started by the India Infoline Finance (IIFL) NCD on September 5 which received an overwhelming response from the investors and was oversubscribed by 2.36 times. This was followed by Shriram City Union Finance’s NCD on September 12 which, at the time of writing this report, has been subscribed 0.89 times. The analysis of the above two NCDs is available on our website www.dsij.in. Further, SREI Infrastructure Finance is also expected to raise funds any time soon through the NCD process. At present Muthoot Finance and Religare Finvest are tapping the market with their NCDs. Are they worth investing in? Given below is our analysis of both the companies to help investors to arrive at a decision.

Muthoot Finance
Muthoot Finance is a systematically important non-deposit accepting NBFC and is the largest gold finance company in India in terms of its loan portfolio. As on March 31, 2012, around 99 per cent of the revenue for the company was derived from its gold loan business which has increased by 55 per cent to Rs 24,417 crore on a YoY basis. Its capital adequacy ratio (CAR) stood at a decent 18.29 per cent while its asset quality worsened further with the net NPAs at 0.57 per cent as against 0.33 per cent in the same period last year. The company reported a stupendous growth in its net profit for FY12 at Rs 892 crore as against Rs 494 crore in the same period last year. The funds raised by the company through this issue will be used for its various financing activities, including lending and investments, repayment of debts, etc.

Religare Finvest
Religare Finvest is a subsidiary of Religare Enterprises and is also a systematically important non-deposit accepting NBFC that focuses on financing small and medium enterprises (SME) and retail capital market finance. As on March 31, 2012, its SME finance accounted for around 70 per cent of its total loan book while the retail capital market finance was around 13 per cent and the balance 17 per cent was in the form of corporate loans and auto leases. For FY12 the loan book of the company increased by 40 per cent to Rs 12,573 crore on a YoY basis. Its capital adequacy ratio (CAR) improved by 349 basis points to a decent 19.65 per cent. The asset quality of the company faced serious issues as it worsened further and its net NPAs stood at 0.51 per cent as against 0.02 per cent in the same period last year. The year’s profit increased by 20 per cent to Rs 137 crore. The company wants to raise funds with the same kind of objectives as of Muthoot Finance.

Issue Information
Muthoot Finance and Religare Finvest have both given five options to investors that are spread across various horizons. Muthoot Finance, for instance, has five options offered for two, three, five and six years with an effective yield in the range of 11.50 to 12.4 per cent. The third option has monthly interest rate payments while the fifth option is cumulative in nature and doubles the money in six years. The remaining three options have annual coupon rates. The issue has already opened on September 17 and is expected to close on October 5. On the other hand, the first and second options of Religare Finvest are for 36 months while the third and fourth are for 60 months. The fifth option is to double the money in 70 months which results in an effective yield of 12.618 per cent. The issue has already opened on September 14 and is expected to close on September 27.

Both the companies are tapping the market to raise approximately Rs 500 crore through these NCDs. The plan is to raise NCDs worth Rs 250 crore with an option to retain the oversubscription of Rs 250 crore. The minimum application for both the issues is of Rs 10,000 (10 NCDs with face value of Rs 1,000 each). Thereafter the application can be made in multiples of Rs 1,000 or one NCD. Both the NCDs will be listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The following is the issue information table of both the companies which shows the horizon and the rate of interest available under various options for retail individuals.

Conclusion
One should note that IIFL had the highest coupon rate of 12.75 per cent as it was unsecured in nature. Given the secured nature of these two NCDs, we believe that both these companies are offering attractive coupon rates. The issue would be allotted on a ‘first come first served’ basis and it is quite possible that investors would rush in with the same kind of agility as was experienced with the IIFL NCD. Therefore it would be wiser not to wait for the last day to subscribe. Also, one should note that the volumes on the exchanges are quite low and hence the investment must be done with the objective of redemption at the time of maturity. The interest received on these NCDs would depend on individual tax slabs, subject to the normal tax rate.

For those seeking greater liquidity, the third option of monthly interest payments offered by Muthoot Finance would be better. The first option would be good for those opting for shorter tenures of say, 24 months. If we compare the fifth option of both the NCDs which doubles the money, we see that Religare doubles the money in 70 months compared to Muthoot Finance which requires 72 months. One of the reasons could be that Religare Finvest is a subsidiary of Religare Enterprises, a diversified financial service company which is listed on the bourses while Muthoot Finance itself is listed on the exchange. One should note that a listed entity is more reliable and is more transparent as it regularly give updates to the investors and is also consistently under the watch of the regulators.

The key risk associated with Muthoot Finance is the high volatility in gold prices and the government’s norms that impact the business outlook of those engaged in this sector. The NPAs of both the companies have been rising and this is definitely not a good sign. We at Dalal Street Investment Journal believe that given the attractive yield one should park a small portion of investment funds to be able to diversify the risk options. Therefore, invest with a limited exposure.