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.
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.