Mumbai: Investors looking for higher returns compared to traditional bank deposits, could consider the upcoming Non Convertible Debenture (NCDs) issue by gold loan financer Muthoot Finance. The company’s NCDs rated ‘AA’ could fetch returns between 7.15% and 8% annually. The issue, which opens on Tuesday, will close on November 20.
Interest rates offered by Muthoot Finance are higher than those offered by banks and corporate deposits. A fixed deposit from SBI pays a up to 5.4%, while a corporate deposit from a AAA rated company returns 6- 6.5% every year. The higher returns are because of the lower credit ratings.
“Given that we are likely to remain in a low interest scenario, this NCD gives a chance to earn 150 basis more compared to a bank or corporate deposit,” says Anup Bhaiya, MD and CEO, Money Honey Financial Services. “However, since NCDs are illiquid and the company has a large chunk of its business from gold financing, investors should have only 10-20% of their fixed income portfolio in such products.”
The public issue has a base issue size of Rs 100 crore with an option to retain oversubscription up to Rs 1,900 crores aggregating to Rs 2000 crore.
Investors should also buy with an objective of holding till maturity. Though NCDs are listed on the stock exchange, liquidity could be thin. Investors have the option of putting money in Muthoot NCDs that expire in 38 months and 60 months. Financial advisors are recommending locking investments into the 60-month-NCDs, which will earn the higher 8%.
Investors have been averse to buying bonds or NCDs of lower-rated companies especially financers due to credit rating downgrades events and defaults by issuers. With economic growth slowing, investors are worried how NBFCs will fare and are not keen to take risk. Analysts said Muthoot Finance is better placed than many others despite not enjoying the best credit rating
“Gold prices have risen 30% in the last one year, and the outlook for the yellow metal is positive. This increases a gold financiers’ margin of safety as they have much higher collateral than loan disbursed,” says Rajat Sharma, founder of Sana Securities. The margin of safety in Muthoot as on June 30, stood at 42%, which is comforting, he said.
Sharma recommends Muthoot Finance NCD over corporate deposits from NBFCs, as he believes the prospects for the gold finance business in the context of the current pandemic is better than other lending businesses.
Credit: Stocks-Markets-Economic Times