MMFSL NCD Issue : Is it attractive at this juncture

Issue Details

Public issue of subordinated , unsecured Redeemable NCDs from Mahindra & Mahindra Financial Services Ltd (MMFSL) for Rs.250 Crores with an option to retain over subscription up to Rs.1000 Crores.


Issue Date : Wednesday 25-May-2016 – First come First basis
Lead Managers : ICICI Securities Limited, Edelweiss Financial Services Limited, A. K. Capital Services Limited, SBI Capital Markets Limited, JM Financial Institutional Securities Limited, Trust Investment Advisors Private Limited and Yes Securities (India) Limited.
Registrar : Karvy Computershare Private Limited
About the Company

The company was initially incorporated in 1991 as Mahindra Finance, a non-banking financial company (NBFC), by M&M, the majority shareholder, along with Kotak Mahindra as a strategic investor. In 1998, M&M bought out Kotak Bank stake and it became its wholly owned subsidiary MMFSL . M&M holds 51.2 % stake in the company.

MMFSL is the largest financier of M&M’s vehicles providing financing to about one-fourths of total sales of M&M. This activity accounts for 48% of MMFSL’s total financing. Its key subsidiaries include Mahindra Rural Housing Finance Ltd (MRHFL) and Mahindra Insurance Brokers Ltd (MIBL). In August, 2015, Tech Mahindra Ltd, along with Mahindra Finance, received in-principal license from Reserve Bank of India for setting up a payment bank and this is expected to commence operations in 2017.

Rating : Ind-Ra, the domestic arm of global ratings agency, Fitch, has assigned ‘AAA’ rating to MMFSL’s issue of NCDs. MMFSL NCDs also enjoy “CARE AAA” rating.The other rating agency CRISL continues to assign FAAA rating to its FD and AA+ rating to long term borrowings of the compnay.7.9 %)

Comparison with other Instruments :

FDs of Banks : (Figures in brackets are for Sr. citizens)

State Bank of India Government Bank Benchmark 7.25% – 7.50%(7.75%)
ICICI Bank Private Bank Benchmark 7.40% – 7.50%(7.9%)
  • Other smaller private Banks like Ratnakar Bank & recently formed Bandhan bank offer 8.75% maximum(9.25% for senior citizens)
  • Max. Rates for other banks are DCB 8.1% (8.6%) , IDFC Bank 8% (8.5%) , Yes 7.75% (8.25%), IDBI- 7.75%(8.25%), Axis 7.5%(8%) , BOB 7.3% (7.8% )
  • Post office is 7.9% (compounded Qtrly)

FDs of Cos. & Housing Finance Companies

  • FD of FAAA rated company Bajaj Finance offer 8.9% interest max for period of 24-60 months.
  • LIC HF offers maximum of 8.5% on 5 year FD scheme
  • Housing Development Finance Corporation offers 8.4% on FD.
  • Dewan Housing finance (DHFL) . FAAA FD offers 8.75% for upto 10 year period.
  • MMFSL FD schemes offer rates of 8.45% for tenures of 1-5 years
  • NCDs due to listing are more liquid than FDs.

Taxfree & Taxable Bonds

  • Recently issued Tax free Bonds of IREDA, HUDCO, IRFC, NHAI are being priced at a YTM(Yield to Maturity) of 7.1%. The older tax free bonds( 8.1%, 8.8% etc.) have YTM in range of 6.65%-6.9%
  • Tax free return from MMFSL NCD issue for 10%, 20% and 30% Tax bracket comes out to be 8.1%, 7.2%, 6.3% respectively.
  • AAA rated taxable bonds of NTPC & SBI are trading at a YTM of 8.28% and 7.93% respectively with good liquidity.
  • AA or AA- Bonds trade at 9-10.5% YTM range and many are not very liquid
  • Senior Citizen scheme offers 9.3% for five years, but is restricted (no OD) and interest rates are pegged each year and thus can go down.(already down to 8.6 % for ICICI)
  • PPF offers 8.1% tax free p.a. but rates are subject to revision from time to time.

Initial Assessment :

1)This year budget has given a fresh impetus to rural economy and MMFSL is likely to benefit from the same.

2) Mahindra Finance has a distinguished past & support of M&M group provides it a good degree of dependability and financial strength.

3) Due to its size & name, issue could enjoy fair amount of trading & thus interest & liquidity.

4) Suitable for persons who are in low tax bracket & retiring persons. Not suitable for those in higher tax bracket as Post Tax yield is lower than present yield on Tax free bonds available in the secondary market.

5) Other NCD issues are expected from likes of Canfin Homes etc. & they could be at a price bit lower thus helping better price discovery for MMFSL NCD

6) Upfront sharing of brokerage by the broker may increase the yield.

7) Immediate Listing gain could be marginal only.

8) Investors with bit longer holding my get slightly better returns, but tax free bonds will continue be preferred choice of investors. Change in Bank rates may not happen in very near short term.

9) No TDS is a plus point as last year TDS has become applicable on RD also.

10) Possibilities of any capital loss for those applying to this NCD are quite low

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