Prime NCD review – Should you invest in Muthoot Finance NCD?

Muthoot Finance, a non-deposit taking NBFC, registered with RBI, has come up with a public offering of secured non-convertible debentures (NCDs) for an amount aggregating to Rs.100 crore with an option to retain over-subscription up to Rs.900 crore, aggregating to Rs.1,000 crore.

The minimum subscription should be for 10 NCDs and multiples of 1 NCD, which means a minimum investment of Rs.10,000 and in multiples of Rs.1,000 thereafter. The NCDs are proposed to be listed on the BSE and the tradable lot is 1 NCD. 

The issue opens on January 8 and closes on January 19, 2024. It is quite possible that the offer will close before the actual closure date if oversubscribed.

Muthoot Finance NCD

We recommend that you invest in this NCD to supplement your income need as well as to augment your debt allocation, considering the decent yield from a credit worthy company. 

Rates and terms

Retail Investors have five options to choose from in this bond offer. There are three tenures – 24 months, 36 months and 60 months and monthly and annual interest pay-out options. The monthly interest payment options are only for 36 months and 60 months tenures while annual interest rate options are available across all tenures. 

The 36 months and 60 month tenures carry additional 0.5% incentive over the offered yield of 8.5% for annual interest pay-out options and hence the yield of 9% (please note that the incentive is not available for cumulative option hence the effective yield for annual payout and cumulative work out to be roughly the same).

The following table provides details of coupon rates on the options and the effective yield. We recommend locking into 36-month annual payout with effective yield of 9%.

About the company

Muthoot Finance (called in the market as Red Muthoot) is a stock market listed NBFC primarily engaged in gold loans business in India. It is the largest player in this space by AUM and operates a network of 4,745 branches across 22 states, although South India accounts for almost half of the loan portfolio. At standalone level, gold loan accounted for ~95% of the loan portfolio at the end of FY23, amounting to Rs.61,875 crore. 

It has two material subsidiaries, Muthoot Homefin and Belstar Microfinance operating in the areas of affordable housing loans (AHFC) and microfinance (MFI) respectively. Belstar is one of the top 10 NBFC – MFI in India with a total AUM of Rs.7, 874 crores at the end of September 2023 (H1FY24). 

The AHFC book is small at close to Rs.1,650 crores at the end of September 2023. 

At a consolidated level, these subsidiaries account for ~13% of the loan AUM.

Muthoot Finance got listed through IPO in FY11 and has since then maintained a healthy track record of financial performance, shareholder returns and governance. The stock has also commanded premium valuation in market owing to these factors (currently quoting at 2.7 times price to book value)

Below is a brief data on key standalone financial information of the company.

Business Pros & Cons

Muthoot Finance has been going through a challenging phase in the last two years on account of anaemic growth in AUM, increased competitive intensity and rising cost of funds, all putting pressure on NIM, RoA and RoE. High demand for gold loans during Covid, record auctions due to non-payment by borrowers post covid and competitive intensity took a toll on its performance in FY23. 

But it has seen a strong revival in H1FY24 with over 20% year-on-year growth in gold loan AUM and 18% growth in PAT. Higher gold prices have also aided accelerated AUM growth, as has been the trend in the past also. 

Sale of portfolio to asset reconstruction companies amounting to Rs.700 crore may also have taken a toll on profitability in H1FY24 despite high growth in AUM. This also led to a spike in Gross NPA to 4% in H1FY24 (September 2023) from 3.79% at the end of FY23, while falling sequentially from 4.26% at the end of June 2023. Having said that, the write-offs are still miniscule at 0.01% of loan assets as recovery is almost assured in gold loans, at 70% loan to value.

Despite the challenges, Muthoot Finance remains a dominant franchisee in this segment and may be able to defend its market position despite the competitive intensity. It has a very healthy capital adequacy (CAR) of over 30% at the end of H1FY24 with Tier – 1 CAR of 29.55%. Liabilities are also well funded through a mix of bank borrowings (~65%) and NCDs (~25%) while the portfolio is highly liquid with over 65% of the loans repaid in 6 months.

Further, the MFI segment has also done extremely well in H1FY24 due to robust demand from that segment.

Credit rating

ICRA has assigned credit rating of AA+ (ICRA AA+, Stable) rating for Muthoot Finance NCD programme through public placement.  

ICRA has considered its dominant position in the market, healthy financial performance, and high capitalisation levels (CAR) as the key positives to accord its rating, while also considering of the risks related to competitive intensity in gold loan business and its diversification initiatives.

Overall, the positives significantly overweigh the negatives and hence this rating.

Our take

Muthoot Finance is the largest gold loan NBFC in India. The business fundamentals are robust owing to high liquidity (gold jewellery as a security being liquid) of the loan portfolio.  Muthoot Finance is also listed in stock market since 2011 and hance since maintained a healthy track record of financial performance, shareholder returns and governance.

The 9% coupon rate offered by the Muthoot Fincorp NCDs for the tenure of 36 months appears attractive relative to yields prevailing in the market and is our preferred option, The current offering is at least 50-70 basis points higher than high quality AA+ papers. The higher coupon as seen in the information document is added as an incentive for non-institutional investors. 

The NCDs being offered are proposed to be fully secured by way of subservient charge with existing secured creditors on all loan receivables (both present and future) of the company. The bonds do not carry any Put or Call options. They will however be listed on the BSE, if investors wish to exit before maturity. However, such exit is subject to adequate trading volumes and the market price can vary from face value. 


The bond is suitable for moderate risk investors either wanting some income or to augment their fixed income option. Our recommendation is to buy and hold and not for trading purpose. Make sure your exposure to this bond is only in addition to safe options such as deposits and government or RBI bonds, if you are building an income portfolio. Keep exposure limited to under 5% of your fixed income portfolio.


Interest income on NCDs is taxable at your slab rate whether on pay out or under the cumulative option (if you hold till maturity). If you sell the bond in the exchanges in less than a year, short-term capital gains, at your tax slab, will be applicable. If you sell after a year of holding, then long-term capital gains tax of 10% without indexation will apply.

General disclosures & disclaimers

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19 thoughts on “Prime NCD review – Should you invest in Muthoot Finance NCD?”

  1. dayalan jayaraman

    Thanks for the recommendation.
    I Need one more clarity, when we approached India bonds for buying this bond,
    They were suggesting to have a look in to Muthoot capital services ltd: ISIN INE296G07135
    which is from same group offering good yield of 10.26 % . rating also A+. Maturity at Dec 26,
    I need some clarification.
    they bond which your team have suggested Muthoot finance for 9 % ,
    what is your opinion on above bond.

  2. Thank you for a useful article. Why is the company offering payout under 2 separate heads, coupon and incentive. Is there a catch? For example, will the incentive payout be EVERY year along with the coupon? Are both the payouts treated equally for taxation purpose? Would appreciate a clarification. Thanks.

    1. Nothing much of a catch. They want to keep the institutional rate lower than non-institutional. Hence the addl rate by way of incentive. Both are treated equally for tax purpose and total amount will be paid like interest. thanks, Vidya

  3. nikhil.abhyankar

    Thanks for the alert and the recommendation.

    A couple questions:
    1. Is the incentive applicable for the monthly interest payout too, as in the table for the NCD options?
    In the text, you have mentioned that the incentive is offered with the annual interest pay-out option.

    2. The effective yield is calculated assuming that the interest paid out is also invested at the same rate of interest, is that correct? In other words, if the interest is not reinvested at the same rate, I won’t get the effective yield, right?

    1. Our reco is the annual payout.Hence the note there is for that. yes, monthly payouts also have incentive but yields will be lower at 8.75%
      2. When there is payout, it is considered only as payout…not reinvested. An NCD’s return is its cash flow model…it will not take into account any reinvestment. In the payout case, the coupon itself is 9% (0.5% incentive) and they call it the effective yield.


    You have recommended specifically for option 4 ie 36 months period with Annual interest pay out (yield of 9%). Is it ok if the option is preferred for 60 months with Annual interest pay out (yield of 9%) (option 5) considering for long time locking of the good and safe yield .

    1. We do not prefer the 5-year option. The year may lend some opportunity for higher rates if policy rates remain like they do, and it is good to keep some surplus to invest at higher rates for longer tenure when opportunity presents. thanks, Vidya

  5. Ganesan Rajagopal

    > We recommend that you invest in this NCD to supplement your income need as well as to
    > august your debt allocation, considering the decent yield from a credit worthy company.

    Typo, august -> augment

    Is it really true that these bonds will get equity like capital gains treatment? In that case it seems like taking the cumulative option and selling the bond with accumulated interest would be better tax wise. Of course, liquidity may not be available when you chose to exit.

    1. Thank you for pointing out the typo. Corrected. Bond taxation is not the same as equity taxation. As far as I understand, the interest on cumulative bond is supposed to suffer TDS every year and same has to be filed as income every year. In that case, only the gain (if any) in excess of such interest could be taxed under LTCG. Kindly check with your auditor on this. thanks, Vidya

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