Magma Fincorp - BUY - Q2FY12 : - A mixed bag:: Centrum

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 Magma Fincorp

BUY

Target Price: Rs117

CMP: Rs65

Upside: 80%

A mixed bag

Magma’s Q2FY12 numbers were characterized by continued strong disbursement growth, healthy asset quality and sharp NIM contraction. It should be noted that the recent change in accounting policies renders YoY comparison inconclusive and misleading. As we factor in lower securitization benefit, steeper NIM contraction (55 bps YoY in FY12) and lower valuation multiple (due to challenging operating environment), we lower our target price to Rs117 (from Rs125 earlier). We retain Buy rating.

m      Strong disbursements growth momentum continues: Disbursements in Q2FY12 grew by a healthy 37% Y-o-Y led by a jump in lending to Cars & Utility segment and consistently strong growth in high yielding segments. The mix of the high-yielding assets increased to 23% in Q2FY12 vs 18% in Q2FY11. The strong growth in Cars & Utility segment, despite moderation in overall auto sales volumes in recent months, stems from Magma’s 1) rural and semi-rural focus where demand remains healthy and 2) new branch additions.

m      Spread contracts as costs increase outpaces yield expansion: Reported NIM contracted to ~4.2% in Q2FY12 from 4.6% in Q1FY12, led by a sharp jump in cost of funds which more than offset the gains on blended yields. Importantly, Magma’s credit ratings were upgraded recently and this should accrue benefit in terms of competitive cost of funds over the medium term.

m      Collection efficiency at 99.5%: Collection efficiency remains strong at 99.5% for Q2FY12 though marginally below 100.1% in Q1FY12. The strong collection efficiency and healthy credit quality of the book helped contain the provisions at Rs87mn (flattish QoQ). However, the secular improving trend in write-off ratio has reversed in Q2FY12 as write-off ratio inched up to 0.24% in Q2FY12 from 0.2% for Q1FY12.

m      Cheap valuations, Reiterate Buy: We continue to like the stock due to cheap valuations, large potential for growth, and a seasoned senior management team that has seen multiple cycles and has a clear focus on containing risks.  Its current multiple of 0.9x FY13 BVPS, Magma trades at a significant discount to its peers and factors in potential risks amply. We reiterate Buy.