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Magma Fincorp (Magma), with two decades of lending experience in CVs, cars and construction equipment in tier II/III
towns, has built a profitable business model. While a pan-India network reduces geographic concentration risk, entry into
high-yield segments of tractors, SMEs and used CVs has expanded the addressable market. Also, Magma’s focus on
under-serviced buyers in under-banked regions ensures elevated yields. Magma has developed sound collection
efficiencies to protect its asset quality – evident in low credit cost of 0.3% (on AuM) as of FY11. Hereon, we expect Magma
to scale up rapidly by leveraging the existing network and adding branches. Disbursements are expected to show a robust
38% CAGR which, with lower securitization, would lead to 52% CAGR in advances over FY11-13E. This, and expanding
margins led by rising share of high-yield products and likely capital infusion in FY12, would spur 39% CAGR in NII. At 1.2x
FY12E BV, the stock trades at a deep discount (25-55% to peers). Given Magma’s high growth and profitability potential,
we initiate coverage with Outperformer and an 18-month price target of Rs120 (1.8x FY13E BV). Any changes in regulations
and increased competition pose key risks.
A resilient business model: Pan-India footprint, a diverse product portfolio and efficient business processes are the key
strengths of Magma’s business model. With its focus on rural and semi-urban first-time customers (80% of branches in
these areas), and limited competition from banks, Magma is aligned to grow in line with a buoyant rural economy. The
efficacy of business model is reflected in high collection efficiency and low credit costs.
Business to gain scale; focus on high-yield loans: Magma is looking to grow its loan book by leveraging the existing
network as also adding new branches. A strong 38% CAGR in disbursements and a decline in securitization to 35% of AuM
by FY13E, we believe, would drive 52% CAGR in advances over FY11-13. While yields are indeed prone to competitive
pressure, a prudent tempering of mix towards riskier but high-yield business lines would keep spreads intact (4.7% over
FY11-13E). However, traction in these business lines could lead to an increase in provisioning expenses to 0.6% of AuM by
FY13 up from 0.3% in FY11.
Traction in earnings; stock attractively priced: Strong NII momentum and improved operating leverage are expected to
drive 41% earnings CAGR for Magma over FY11-13, with steady RoA of 2.4% by FY13E. Despite a likely equity dilution of
Rs4bn in FY12 (factored into our estimates), we see Magma generating a sustainable RoE of 20%+. At attractive valuations
of 1.2x FY12E P/BV, the stock offers significant upside potential.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Magma Fincorp (Magma), with two decades of lending experience in CVs, cars and construction equipment in tier II/III
towns, has built a profitable business model. While a pan-India network reduces geographic concentration risk, entry into
high-yield segments of tractors, SMEs and used CVs has expanded the addressable market. Also, Magma’s focus on
under-serviced buyers in under-banked regions ensures elevated yields. Magma has developed sound collection
efficiencies to protect its asset quality – evident in low credit cost of 0.3% (on AuM) as of FY11. Hereon, we expect Magma
to scale up rapidly by leveraging the existing network and adding branches. Disbursements are expected to show a robust
38% CAGR which, with lower securitization, would lead to 52% CAGR in advances over FY11-13E. This, and expanding
margins led by rising share of high-yield products and likely capital infusion in FY12, would spur 39% CAGR in NII. At 1.2x
FY12E BV, the stock trades at a deep discount (25-55% to peers). Given Magma’s high growth and profitability potential,
we initiate coverage with Outperformer and an 18-month price target of Rs120 (1.8x FY13E BV). Any changes in regulations
and increased competition pose key risks.
A resilient business model: Pan-India footprint, a diverse product portfolio and efficient business processes are the key
strengths of Magma’s business model. With its focus on rural and semi-urban first-time customers (80% of branches in
these areas), and limited competition from banks, Magma is aligned to grow in line with a buoyant rural economy. The
efficacy of business model is reflected in high collection efficiency and low credit costs.
Business to gain scale; focus on high-yield loans: Magma is looking to grow its loan book by leveraging the existing
network as also adding new branches. A strong 38% CAGR in disbursements and a decline in securitization to 35% of AuM
by FY13E, we believe, would drive 52% CAGR in advances over FY11-13. While yields are indeed prone to competitive
pressure, a prudent tempering of mix towards riskier but high-yield business lines would keep spreads intact (4.7% over
FY11-13E). However, traction in these business lines could lead to an increase in provisioning expenses to 0.6% of AuM by
FY13 up from 0.3% in FY11.
Traction in earnings; stock attractively priced: Strong NII momentum and improved operating leverage are expected to
drive 41% earnings CAGR for Magma over FY11-13, with steady RoA of 2.4% by FY13E. Despite a likely equity dilution of
Rs4bn in FY12 (factored into our estimates), we see Magma generating a sustainable RoE of 20%+. At attractive valuations
of 1.2x FY12E P/BV, the stock offers significant upside potential.
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