Manappuram Finance NCD Review

by Manshu on August 17, 2011

in Fixed Deposits

It’s raining NCDs these days, and the latest company to offer its bonds is Manappuram Finance. Most of you will know them by their ads on TV about gold loans, and that’s the business they’re in.

They give loans against gold to customers in the rural and semi urban areas, and have been in this business since 1999.

They are primarily a South Indian company as 86% of their loans are made in Andhra Pradesh, Karnataka, Tamil Nadu and Kerala.

Manappuram Finance was incorporated in 1992, but the business has been in existence for quite some time. The gold loan business, and rising gold prices have been a boon for them as their revenues have increased rapidly in the past few years driven by that business. On March 31st 2011 their portfolio of gold loans stood at Rs. 63,705.41 million, which rose from Rs. 18,512.26 million the year before, and was Rs. 4,000.63 million in the year before that.

This is about 52.97 tons of gold as at 31st March 2011, 22.45 tons in 2010, and 13.34 tons in 2009.

Their revenues last year were Rs. 11,815.26 million, and a profit after tax of Rs. 2,826.64 million. You can see this is a fairly big company with a pretty decent profit margin, and that shows in its credit ratings which is P1 + from CRISIL for short term debt instruments which is the highest rating a company can have.

These are some of the things that have been going well for the company, now let’s take a look at some risks that the company faces as described in their prospectus.

Risks Mentioned in their Prospectus

Manappuram lends by keeping gold as a pledge, so of course the big risk they face in their business is if gold prices took a dive. Other than that you have seen that there are other NBFCs getting into the loan pledging business and the competition is really heating up here.

An interesting risk that I saw in the prospectus was deficiencies found by RBI when they had conducted a routine inspection. Manappuram Finance auctions the gold pledged against loans which borrowers aren’t able to repay, and RBI found that there was a big time gap between when the loan became overdue, and when they conducted the auction.

RBI also found that some of their branches didn’t have seemingly basic information about who won an auction, how much did they bid, mode of payment etc. There was also one case where RBI says that Rs. 95.86 million from an auction proceed were ploughed back in the company as working capital where it should have been returned to the concerned borrower.

Another RBI routine inspection in June 2011 found deficiencies in their loan documentation. Some branches didn’t have sufficient identity documentation, and others didn’t have records of the scheme under which the loans had been disbursed.

Other notable risks include the promoters having given a personal guarantee for loans worth Rs. 6.63 billion, and if the lenders require any alternate guarantee then that would put the burden on Manappuram to come up with either alternate source of funding or come up with adequate guarantee.

The promoters have also taken a loan of Rs. 1 billion from Religare by pledging their shares in the company. NSE website shows that they have pledged about 20% of their total shares.

As I’ve written before – this is a red flag that I like to watch out for because in my opinion the last thing you want to do is to pledge your ownership stake by taking loans against shares.

These were some things that stood out for me as I was going through the prospectus. Now, let’s take a look at the NCD itself.

Manappuram NCD Terms

The minimum application is Rs. 5,000 and the issue will open on August 18th 2011, and close on September 5th 2011.

The issue has been rated CARE AA- from CARE and BWR AA- by Brickwork. The rating by Brickwork stands for high degree of safety regarding timely servicing of financial obligations, and the CARE rating also stands for high safety for timely servicing of debt obligations.

This NCD will be listed on the BSE, but not on the NSE, and here are the other important features of the Manappuram NCD.

Manappuram NCD Terms

Manappuram NCD Terms

These bonds are secured in nature, and let me reiterate that it doesn’t mean your money is guaranteed by the RBI or anyone else, but simply means that if the company were to go bust, there are some assets which are allocated towards this debt which will be sold off to recover your money. Now, those assets may sell for less than what the company has marked them for, or there could be other creditors who also have claim to them so you don’t get the full money back.

Secured debt is better than unsecured debt, but it doesn’t mean a guarantee in the sense that a lot of people think of it.

So overall, the good thing about the Manappuram NCD is that it’s giving higher rates than the other NBFC NCDs that I have reviewed here, and the credit rating is good as well, but the negative factors are the deficiencies found by RBI during their routine inspections, promoter’s pledge, and managing as well as sustaining its rapid pace of growth.

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{ 78 comments… read them below or add one }

Neel August 17, 2011 at 11:38 am

Manshu, are they listing these NCDs? I could not find their DRHP and because it’s a relatively short term bond, am not very sure whether these would be listed…

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Mithlesh August 17, 2011 at 2:56 pm

dear Neel,

as per business line news, bonds will be listed on BSE.

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Manshu August 17, 2011 at 7:56 pm

Yeah Neel, they are going to list on BSE as Mithlesh says – don’t know why not listing on NSE.

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Mithlesh August 17, 2011 at 2:47 pm

A good bet for short term given the outlook of worrisome stock market :)-

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Milind August 17, 2011 at 3:45 pm

I think they are offering for only 2 yrs

Muthoot is offering for 4 -5 yrs Hence muthoot should be better one

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Neel August 18, 2011 at 12:17 pm

Thanks Mithlesh and Manshu. Am sure there wont be a lot of listing gains here. Just wanted to make sure there is an exit route. Btwm it’s really a smart move by Manappuram. After 2 years, interest rates will come down and so will the cost of capital.

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shashank August 17, 2011 at 3:58 pm

Hi manshu !!

It`s good that you observed the fine details of the prospectus and presented it very nicely. One thing i`ve been observing that these days you are focusing on certain investor`s myths like “practical meaning of secured debt” .

As usual nice post regarding this new issue !!

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Manshu August 17, 2011 at 7:58 pm

Hi Shashank – I hope that’s a good thing :-)

Some of these questions keep popping up repeatedly, so I try to address whatever I feel people have questions on.

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Sahil August 17, 2011 at 6:13 pm

Dear Manshu,
It is now high time to provide comprehensive list of ncd with their codes on bse and nse.
The list should also update as and when new bonds arrive.

Please… please …
they are better to trade in current market.

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Manshu August 17, 2011 at 7:59 pm

Yeah Sahil – you are right – I’ve started work on it already. It is a big exercise and is taking time but hopefully should be get done sometime by next week.

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krish August 17, 2011 at 10:19 pm

Hmmm, pretty interesting facts you’ve highlighted here… Am not sure if you are aware of this, but Manappuram group recently forayed into Gold Retailing business and have opened retail chains in small cities of Kerala & TN — target customer being the low middle class. I wonder if they usurp all the auctionable gold to this new entity of theirs — and hence RBI’s red flag?

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Manshu August 17, 2011 at 10:49 pm

Thanks Krish – they have mentioned several dealings with promoter companies in the prospectus, and this must be one of them. From reading that info I couldn’t ascertain the size of these dealings, so it’s interesting to hear that from you.

Also, from their website and the info in the document, I see that they pride themselves on a very fast disbursement system and view it at as one of their key selling points. So, to me it felt like what they gain in speed, they are compromising in the quality of due diligence they do. Also, it seems like by being in this kind of business where the interest rate is high and they possess a dear and valuable asset of their customer, they feel that they can go a little lax on the paperwork.

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krish August 17, 2011 at 11:26 pm

Very true… Though there’s not evidence for this fact and may purely be fictional, there are rumors out there that says burglars/thieves use such NBFCs effectively to convert their looted gold… as there’s very little paper work and one can get a loan in 3-5 mins (there are ads which claim loans in 2 mins flat) such elements use this medium to convert their ill gotten gold to cash, instead of getting caught with the “maal”… It’s a win-win situation for the company too, they get the gold at a cheaper rate as there won’t be any claims!

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Manshu August 18, 2011 at 12:04 am

Wow – that’s something!!!

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Neel August 18, 2011 at 12:21 pm
Manshu August 21, 2011 at 10:56 pm

That’s crazy man!

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Mithlesh August 18, 2011 at 1:34 pm

I applied for it today (option-2). Lets see howz the allotment.I applied in STFC NCD as well and got very less allotment.

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ankm83 August 19, 2011 at 10:25 pm

Hi, any updates on the subscription allotment status of Manapuram NCD. Where is this info available on the web..Heard its not doin tht well

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Manshu August 21, 2011 at 10:27 pm

I haven’t seen the numbers anywhere, and I don’t think they are published on the web either.

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Ramesh August 20, 2011 at 10:56 pm

I think there is no interest payable in option 1. it means the gain will be treated as long term gain. hence no Tds or capital gain payable at all! am I right or it is just a wishful thinking?

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Manshu August 21, 2011 at 10:10 pm

Hi Ramesh, You are right in saying that it will be treated as capital gains, but they will be taxed like other long term capital gains on debt. They aren’t tax free unfortunately :)

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Suraj August 21, 2011 at 3:06 pm

I think Manappuram finance Ltd is give best offered in NCD because it is a very largest Gold loan company and it’s latest news he has been complited 10,000000 cr. in only Gold loan outstanding so i think it’s better opertunity for invest NCD

And finially i suggest for all please do imideatly, and dont compromise………………….

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Manshu August 21, 2011 at 10:08 pm

Your use of zeroes is rather liberal, and not quite factual :)

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Ramesh August 21, 2011 at 11:25 pm

Thanks Manshu for the clarification.

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Beena August 22, 2011 at 9:56 am

Pls. give what is minimum amt. of manappuram NCD.

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Manshu August 22, 2011 at 4:37 pm

It’s Rs. 5,000 Beena.

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Sanjay August 24, 2011 at 1:21 pm

Dear Manshu
I always look forward for your advices. I have to make on investment decision on Muthhoot and Mannapuram NCD. can you sugget the better one. Further whether, NCD returms are taxables.

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Manshu August 25, 2011 at 1:18 am

Dear Sanjay,

Yes NCDs are taxable, and I see a lot more NCDs coming in the market, also India Infoline has listed on the market with a huge discount of 8% today. I would wait a little and not invest in any NCD right now.

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Sanjay August 25, 2011 at 10:17 am

thanks. pl clarify that interst offered on NCD are fixed or it is linked to market by virtue of listing. Is Listing at discount is issue of concern, as NCD are offering fixed interst rate.

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Manshu August 25, 2011 at 10:07 pm

Sanjay – the interest rate is fixed, so every year you will get the interest promised. However the price at which it has been listed changes. That only affects you if you have plans to sell it before maturity, else you will get the face value on maturity.

Listing at discount is a concern – yes. That’s because it means you could have got the bonds cheaper while waiting it to list rather than investing it in the initial time period.

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Sanjay September 1, 2011 at 11:58 am

It means i can buy NCD from market after listing at lower rate and can get the fixed interest. but the net effect remains the same as rate are fixed and related to investment amount i.e. returns at fixed %age . kindly correct me if am wrong.

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ankm83 September 1, 2011 at 12:48 pm

Hi sanjay, the coupon rate is a fixed % of the face value of debenture. So even if you buy NCD at 980 from market, you will get 12.2% of 1000 as interest, so your effective yield will be higher than the coupon rate.

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Sanjay September 1, 2011 at 3:56 pm

It means NCDs are open issues like MF and can be bought from the market. kindly bear with me for my poor knowledge on finance.

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ankm83 September 1, 2011 at 4:32 pm

yes sanjay, NCDs can be bought from market. they are listed on stock exchanges

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ankurm83 August 26, 2011 at 12:07 am

I dont think Manappuram 400 day issue will list at discount like IIIFL. Coz as it is a fairly low risk/ low tenure instrument, which pays 1132.25 upon maturity. For eg. if above instrument is available at 950 upon listing (5% discount), YTM would be 17.4%, making it a whopping buy. Muthoot being longer term, has higher chances of trading at discount.

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sunesh August 25, 2011 at 1:22 pm

hi sir. as far as i know Manappuram finance Ltd is give best offered in NCD because it is a very largest Gold loan company. but i just want to know, is there any discount rate in manappuram NCD.? & what is the maximum amount of manappuram NCD.

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Manshu August 25, 2011 at 10:02 pm

I’m sorry I don’t understand what you mean by discount rate? Do you mean will retail individuals get it at a price less than others? If that’s the question then no, they won’t.

The maximum amount for being considered in the retail category is Rs. 5 lacs.

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ankm83 August 29, 2011 at 9:53 pm

hi manshu, dont you think there is lack of transparency in the debt markets on information such as subscription (%), allotment status. Applicants in NCDs are in the black about everything

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sandeep September 7, 2011 at 2:19 pm

Any update on subscription and allotment status.

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ankm83 September 10, 2011 at 9:29 am

Hi sandeep, Allotment has been done

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AB September 7, 2011 at 9:19 am

Hi Manshu – When will the Manappuram NCD list?

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Manshu September 11, 2011 at 5:35 am

AB – haven’t seen any notices or articles with a date yet, but I’ll update this thread when I do find out. Thanks!

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Mithlesh September 10, 2011 at 7:45 pm

Allotment is done. Got an SMS today from CDSL . Full allotment for me.

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Manshu September 11, 2011 at 4:51 am

Great! Thanks for letting me know Mithlesh – this is the first one you got full allotment for, is it not?

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Mithlesh September 11, 2011 at 11:51 am

Yeah manshu… Looks like manappuram NCDs are not as much in demand as Shreeman transport fin.

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sumit kumar September 12, 2011 at 8:38 pm

when will manapuram gold ncd listed on BSE?????

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ankm83 September 13, 2011 at 10:30 pm

Manappuram is getting listed tmrw

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sandeep September 14, 2011 at 2:01 pm

NCD is listed at bse but i could not understand why it is traded low rate infact from issue price.

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ankm83 September 14, 2011 at 4:18 pm

hi sandeep, the discount was higher during start of the day, later it came down. If you look, the 400 day option has closed at par 1000 Rs, as shorter term paper is always considered less riskier (consider IIISL 5 yr at sizeable discount to 3 year one). The 2 year manappuram is at discount, closed at 974 (in fact at those prices, the yield is ~14%, which is a good enough reason to buy as 2 years is not a very long horizon to consider this risk)

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sandeep September 14, 2011 at 4:31 pm

thanks, can you please help me to buy, out of any other NCD already listed, is trading on premium or offering good return for shorterm period.

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ankm83 September 14, 2011 at 5:55 pm

hi sandeep, it will be very difficult to take a trading call on bonds (due to lack of liquidity in secondary mkt). I can only advice based on return on holding the bond till maturity. If you consider 2 year horizon, 14% should be a good yield by manappuram. Longer horizon bonds of IIISL (3/5 yr) are available at deeper discount and similar yields (as coupon rate is lesser), but risk is higher. I guess, Muthoot bonds also have potential to offer similar yield post listing when they list at discount. But its better to avoid bonds for any trading gains.

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sandeep September 15, 2011 at 9:59 am

thanks to guide to avoid trading. My purpose was instead of appling throguh allotment pocedure why don’t we buy from the market when it is available at lesser rate from the issue price condiering yield then my concern is how do interest calculated and paid. What is your openion. Pls suggest.

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ankm83 September 15, 2011 at 11:03 am

its only post IIISL, due to heavy supply of NCDs, they are trading at a discount. it was not the case earlier. currently its good opportunity to buy bonds from market at discount, if you want to hold till maturity

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sandeep September 15, 2011 at 11:13 am

then i could not understand what is benefit to the company persay or what is intention behind listing such type of NCD.Is it to be known in the market and get credibility.

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Manshu September 18, 2011 at 10:55 pm

The company is able to raise money Sandeep – that’s the benefit to them. If it trades at a discount later on then that’s not good for their brand, but it doesn’t affect the money that they have already raised.

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AB September 20, 2011 at 10:04 am

Thanks Manshu. I’m unable to see the price of this NCD online. Also that of Muthoot; where can I see the prices.

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nikunj vejani September 21, 2011 at 11:33 pm

i am unable to see the prices if manappuram fin ltd ncd on bse so please provide mee the code on the bse,and also where i could see the prices.

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AB September 22, 2011 at 9:46 am

Nikunj – Following are the BSE codes for Mannapuram:
I. 934826
II a. 934827
II b. 934828

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Raja September 24, 2011 at 9:42 pm

Hi Manshu,

Found this nice post from Prof. Sanjay http://www.sanjaybakshi.net/Sanjay_Bakshi/Articles_files/Trust_Mr_Market_Not_The_Credit_Rating.HTM

Since you write on NCD’s i thought it will be nice if you consider this angle too while publishing report .

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ankm83 September 25, 2011 at 12:17 am

This article is outdated and no longer relevant in the current context. Markets have become far more mature now. Anyways if ppl r taking call on a shady small cap stock or bare investment grade or lower (BBB or lower), they have only themselves to blame for the downfall.

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Manshu September 25, 2011 at 9:27 pm

You are a bit harsh Ank :-)

I think the basic idea still stands true, and in general I tend to think that if the credit rating agencies know something then that means the rest of the world already knows about it and this should be reflected in the stock price, or the data about pledging shares which is something I keep an eye on.

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ankm83 October 4, 2011 at 3:53 pm

having the seen the reaction of stock market and SBI share price to Moody’s downgrade, the agencies are ahead of the curve.

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Manshu October 4, 2011 at 5:34 pm

Then you need a refresher of what happened in the credit crisis :)

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Manshu September 25, 2011 at 9:35 pm

Thanks for sharing the link Raja – always good to read diff perspectives – and in general I think it’s better to avoid some of these smaller companies when it comes to fixed income. That’s one part of your portfolio where you don’t want to to for lower quality for a few percentage point gains – it’s a high risk, low reward kind of thing.

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ankm83 September 25, 2011 at 10:52 pm

The CRA’s knowledge linkage is with debt markets and not share price as the latter anyways is is an outcome of a speculative activity. The prices or yield of debt papers adjust after CRA actions.

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Manshu September 26, 2011 at 12:29 am

I don’t have a very high opinion of these agencies esp. Substandard & Poorest :) always behind the curve.

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ankm83 September 26, 2011 at 2:07 am

Business judgment being qualitative and increased volatility & instability in financial markets place (asset bubbles) has lead to some wrong decisions in hindsight. But that doesnt take away the analytical rigour and importance of credit rating in pricing debt instruments (yield spread over AAA have always been benchmarks for pricing particularly in efficient and mature debt markets – this is a fact). I do tend to agree that increasing information symmetry has lead to more awareness among market participants, which should infact keep a check on rating agency’s role.

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Manshu September 26, 2011 at 5:09 am

The way they have erred in the financial crisis – first contributing to causing it and then worsening the situation by downgrading stuff that should have been downgraded years ago makes me hold a less rosy view than yours.

Even now you see countries being downgraded where the info that came out is nothing new. People have known about these debt issues from years and these downgrades should have come much earlier if they had to come at all.

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Ramesh September 25, 2011 at 11:44 pm

can you grade the best available say top 3 NCDs for a risk adverse individual keeping in mind price/discounted price/risk reward ratio etc.?

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Manshu September 26, 2011 at 12:24 am

To be honest – I think a risk averse investor should stay away from all the issues that have come out recently.

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ankm83 September 26, 2011 at 1:58 am

I think Shriram transport is a fairly strong, AA rated entity. Available at yields of 13%, its a steal. Consider the balance sheet size of this entity, bigger than even many private banks. I would say thts the best bet.

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Ramesh September 26, 2011 at 7:39 am

thanks Manshu.

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Chandan November 24, 2011 at 3:29 pm

I had applied for Manappuram NCD still i have not got it in my Dmat account nor in phisycal form neither any money refund. How can i inquire about it. Plz help.

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Manshu November 24, 2011 at 8:37 pm

Your best bet is to inquire with the company or the broker that helped you get the issue.

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malav February 7, 2012 at 6:13 pm

semi annually interest offer by mannapuram please know me its first interest date when company credit interest to our account.

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harry March 4, 2012 at 12:28 am

is manapuram trustworthy?

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Jitendra P.S.Solanki March 4, 2012 at 12:39 pm

Harry,

There are some issues with the company which you have to consider when you are investing.One is the high debt and second is the reliability on gold for the entire business. both these risk are high as things can go wrong if gold prices suddenly reverses.

Hence it is a high risk investment and should be considered if you have that apetite.

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Subrata Mondal May 1, 2012 at 1:16 pm

Which NCD is better Muthoot OR Mannapuram in terms of security?

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