Motilal Oswal Financial Services NCD issue: Should you invest?

Central banks globally continue to maintain a hard stance on inflation and interest rates. The US Federal Reserve has given no indication of cutting interest rates any time soon. Similar is the case with the RBI as well.

The current elevated interest rates present an opportune time for investors in fixed-income instruments to make the most of high coupons available in certain bonds or debentures.

Quality NBFCs (non-banking finance companies) have been coming out with non-convertible debentures (NCDs) offering high coupons and yields in recent months. These debentures offer particularly attractive yields in the 2-5-year band.

Motilal Oswal Financial Services (MOFSL) has come out with an NCD offer that is open for subscription and closes on May 7, though oversubscription before that date would mean early closure to the issue.

The company is into capital markets, asset & wealth management and housing finance, and is a leading financial services player.

The issue is rated AA (Stable) by agencies CRISIL and India Ratings. These ratings indicate a high degree of safety in servicing principal and interest, and very low credit risk. This NCD comes in four tenors with periodic interest payout options and a couple of cumulative choices as well for a couple of periods. The coupons are fairly attractive.

Here’s more on MOFSL’s debenture offer to help you take an informed investment call.

Attractive yields

As mentioned earlier, the company’s NCD offer comes in four tenors – 24 months, 36 months, 60 months and 120 months. For the first two tenors, there are annual interest payout and cumulative options. For the 60 and 120-month tenors, there are only monthly and annual interest payout choices.

MOFSL offers coupons in the range of 8.85 per cent to 9.7 per cent depending on the tenor and payout option. The effective yields on the various options range from 8.85 per cent to 9.7 per cent. Though not comparable, these coupons are much higher than the interest rate offered by most large banks and NBFCs on their fixed deposits for similar tenors.

Data from Kotak Mutual Fund (sourced from Refinitiv) as of April 23 indicates that corporate bonds rated AA with three-year tenor trade at 8.41 per cent yield on an average presently, while the yield on 5-year bonds is 8.17 per cent.

MOFSL’s NCDs with three-year tenor are available at 9.1 per cent yield for monthly payout and cumulative options, a healthy 70 basis points more than what is available in the corporate bond market. The five-year tenor NCDs with 9.35 per cent yield are also healthy with a spread of 118 basis points over comparable secondary market AA-rated bonds.

The minimum investment required is Rs 10,000.

Investors can consider the three-year and five-year tenors with annual and monthly interest payout options, respectively. Those preferring a shorter period can opt for the 24-month option with annual payout.

Tax is deducted at source on coupon payments in NCDs. In any case, all interest payouts are taxed at your slab.

Scoring on key metrics

Motilal Oswal Financial Services is a significantly large player in the Indian capital market and asset management spaces. It is into institutional equities, retail broking, asset management (mutual funds), alternative asset management, wealth management and investment banking. It also has a home finance division.

-The total assets under advice stood at Rs 4.4 trillion as of December 2023, up 43 per cent year-on-year.

-Lending book has risen 47 per cent y-o-y as of December 2023 to Rs 110.6 billion,

-Return on assets stood at a healthy 9.8 per cent

-Revenues for 9MFY24 were up 32 per cent compared to 9MFY23 and stood at Rs 39.3 billion. The revenues from the key capital markets division grew at a faster rate of 40 per cent over the same period.

-Net profits for 9MFY24 grew 159 per cent over 9MFY23 and came in at a little over Rs 20 billion.

-Among the 27 mutual fund, AIF and PMS schemes, 24 outperformed their respective benchmark in the last one year.

-In the home finance division, key metrics such as yield (14.3 per cent for 9MFY24), net interest margin (7.7 per cent for 9MFY24), capital adequacy (47.5 per cent as of December 2023) and net non-performing assets (1.3 per cent as of Q3FY24) are quite healthy.

Thus, important parameters are robust for the company and given its status as a well-known seasoned financial services player adds to investor comfort.

The MOFSL debenture issue is subscribed to a little under 67 per cent as of April 24. Investors wishing to take exposure can consider applying early so that they get subscription, though the issue is open till May 7.

Limit investing in NCDs in general to about 10 per cent of your debt portfolio.

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