Muthoot Fincorp NCDs offer more than 9% yield: Should you invest?

Till the end of the first half of the calendar year 2023, there were expectations of interest rates having neared their peak gained traction. However, over the past couple of months, an errant monsoon and its uneven spread has caused a spurt in food prices, especially vegetables, and thus pushed up consumer inflation sharply. In India’s case, rates may still be close to their peak with no hikes likely to be announced by the Reserve Bank of India (RBI).

But with the spike in inflation, RBI’s requirement of higher incremental cash reserve ratio for banks to moderate liquidity and an election year looming large, there may be little chances of rates coming down any time soon for the foreseeable future.

Such being the case, fixed income instruments, especially those that offer higher rates in the two to five year band have become more attractive.

• Also Read: Muthoot Finance eyes co-lending arrangement with other NBFCs

In this regard, Muthoot Fincorp has come out with NCDs (non-convertible debentures) that offer fairly attractive coupons and yields across tenors and interest payment options. Should you invest in the non-banking finance company’s NCDs?

Healthy interest rates

Muthoot Fincorp’s NCDs have been rated AA-/Stable by CRISIL. This rating indicates that there is high degree of safety in servicing principal and interest payments, and there is very low credit risk.

The NBFC is offering NCDs for tenors ranging from 24 months to 96 months. These NCDs have multiple interest payment modes – monthly, annually and cumulatively. The 96-month tenor, however, has the cumulative option alone.

For those taking the annual interest payment option, the 24, 36 and 60-month tenors offer coupons of nine per cent, 9.27 per cent and 9.44 per cent, respectively. The effective yields work out to 8.99-9.43 per cent depending on the period of investment chosen. The monthly interest payment modes for the same tenors offer 35-39 basis points lower interest rates. But the effective yields for the monthly and annual interest payment modes remain the same.

We have not taken the cumulative option as it is better to have steady cashflows from NCDs rather than lock the entire principal, especially for longer tenors.

Data from ICRA Analytics compiled by Axis Bank indicates that one, three and five year corporate bonds that are rated AA trade at yields of 7.78 per cent, 8.33 per cent and 8.42 per cent, respectively, in the secondary markets.

Thus, Muthoot Fincorp’s NCDs offer a clear 90-100 basis points higher yield over secondary market bonds with similar credit ratings.

• Also Read: Muthoot Capital Services clocks ₹19.66 cr net profit in Q3

Investors can consider the monthly or annual payout option depending on their cashflow needs. The the 24 and 36-month NCDs are more attractive among the options given the regular payouts and healthy yields for those tenors.

Interest is added to your income and taxed at the applicable slab. Tax is also deducted at source on the interest payout.

After exhausting all safe options of banks (including small finance banks), NBFCs with AAA credit ratings, post office schemes that offer high interest rates, investors can consider parking small amounts in these NCDs as part of their debt portfolio. The exposure should be restricted to less than five per cent of the overall portfolio.

On the path to recovery

Muthoot Fincorp is the flagship company of the Muthoot Pappachan Group (MPG). The company is into gold loans predominantly and financing small businesses. Its subsidiaries offer microfinance, home loans and two-wheeler loans among others. Gold loans accounted for 57 per cent of the group’s overall assets under management (AUM) in FY2023, down from 64 per cent in FY2022 as the group widens its lending base. Microfinance is the second largest segment accounting for around 29 per cent of the AUM.

The gross stage 3 assets to gross loans and advances (gross NPAs) stood at 2.11 per cent in FY2023, down from 2.88 per cent in FY2022. The net stage 3 assets to loans and advances (Net NPA) stood at 0.58 per cent in FY 2023, down from 1.57 per cent in FY2022. Thus, there has been a gradual improvement in asset quality after the challenges posed COVID-19 abated.

Provision coverage ratio is robust at 72.49 per cent as of March 2023, versus just 45.57 per cent in March 2022.

Capital adequacy was strong at 21.34 per cent as of March 2023 compared to 19.42 per cent as of March 2022.

Muthoot Fincorp is on a sound recovery mode after the COVID-19 pandemic’s aftereffects.

The NCD subscription is open till September 14. But it would be better to subscribe earlier in case the issue gets oversubscribed quickly.