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Magma Fincorp
Improvement in profitability underway; we initiate with a Buy
Magma Fincorp’s operations in under-banked areas across India and
its multiple products indicate strong growth potential. We expect the
NBFC’s balance sheet to expand two-and-a-half times over FY11-14e
and expect consistent improvement in profitability from FY13 to drive
valuations up. We initiate coverage on the stock with a Buy rating and
a price target of `80.
Poised to benefit from strong rural demand. We expect strong rural
demand to continue, backed by high food prices and increased
government expenditure on rural projects. Magma has a well-diversified
branch network (194) in 21 states. Most branches (~80%) are in underbanked
rural/semi-urban areas that offer huge growth potential.
Balance sheet estimated to expand two-and-a-half times over FY11-
14. We expect 40% CAGR in loans over FY11-14, backed by: 1) strong
disbursement growth across product segments by leveraging its branches
and, 2) a drop in securitized loan book, from 46% of AUM in FY11 to
28% by FY14, supported by capital infusion of `4.9bn in 2011-12. We
expect the lower share of off-book loans and strong disbursements to
result in robust balance sheet growth over FY11-14.
Sharp rise in profitability to raise valuations. We expect subdued RoE
of ~14% (flat PAT growth) in FY12 due to +200bps NIM contraction,
given: 1) lower securitization income and high borrowing cost, 2) change
in accounting policies and, 3) capital infusion. However, consistent rise in
profitability is likely over FY12-14 on better margins and greater leverage.
We expect RoE of 20% by FY14, which should drive valuations up.
Valuation. At our target price, the stock would trade at a PBV of 1.3x
FY12e and 1.2x FY13e. Risks: Slower-than-expected rural economic
growth that could impact loan growth; increase in NPAs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Magma Fincorp
Improvement in profitability underway; we initiate with a Buy
Magma Fincorp’s operations in under-banked areas across India and
its multiple products indicate strong growth potential. We expect the
NBFC’s balance sheet to expand two-and-a-half times over FY11-14e
and expect consistent improvement in profitability from FY13 to drive
valuations up. We initiate coverage on the stock with a Buy rating and
a price target of `80.
Poised to benefit from strong rural demand. We expect strong rural
demand to continue, backed by high food prices and increased
government expenditure on rural projects. Magma has a well-diversified
branch network (194) in 21 states. Most branches (~80%) are in underbanked
rural/semi-urban areas that offer huge growth potential.
Balance sheet estimated to expand two-and-a-half times over FY11-
14. We expect 40% CAGR in loans over FY11-14, backed by: 1) strong
disbursement growth across product segments by leveraging its branches
and, 2) a drop in securitized loan book, from 46% of AUM in FY11 to
28% by FY14, supported by capital infusion of `4.9bn in 2011-12. We
expect the lower share of off-book loans and strong disbursements to
result in robust balance sheet growth over FY11-14.
Sharp rise in profitability to raise valuations. We expect subdued RoE
of ~14% (flat PAT growth) in FY12 due to +200bps NIM contraction,
given: 1) lower securitization income and high borrowing cost, 2) change
in accounting policies and, 3) capital infusion. However, consistent rise in
profitability is likely over FY12-14 on better margins and greater leverage.
We expect RoE of 20% by FY14, which should drive valuations up.
Valuation. At our target price, the stock would trade at a PBV of 1.3x
FY12e and 1.2x FY13e. Risks: Slower-than-expected rural economic
growth that could impact loan growth; increase in NPAs.
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