Magma Fincorp - Q1FY13 Result Update - Centrum

Magma Fincorp

Buy

Target Price: Rs101

CMP: Rs66          

Upside: 53%

In line with estimates

Magma’s Q1FY13 numbers, reflect a turn in fortunes with disbursement growth picking up and spreads expanding by 20bps QoQ (led by shift in loan mix). However, collection efficiency dipped to 98.3% (though still quite healthy) and write offs inched up to 0.35%. New products (housing, gold and general insurance) should bring in further diversification and improve profitability over the medium term. We retain Buy rating on attractive valuations and price target of Rs101.

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m  Disbursements growth picks up: Disbursements in Q1FY13 grew by a strong 44% YoY – a smart uptick from 28.3% growth registered in Q4FY12. From a product perspective, Cars & Utility segment (50% YoY) and high yield assets (up 104% YoY) drove this growth. The mix of high-yielding assets improved further to 28% from 25% in Q4FY12.

m  Spread improves QoQ led by shift in loan mix: Reported spreads for Q1FY13 at 4.5% indicated an improvement of 20bps QoQ as asset IRRs expanded by 60bps QoQ. The expansion in asset IRRs can be traced to a shift in loan mix with higher share of high-yielding products in incremental disbursements. From a funding source perspective, the management is making a conscious effort to reduce reliance on the banking system, which remains the chief source of funds.

m   Collection efficiency declines to 98.3%: Collection efficiency witnessed a material dip QoQ to 98.3% from 101% in Q4FY12 – partly led by seasonality influences and partly tough recovery environment facing financial companies in general. In line, the write-offs during the quarter also jumped to 0.35% of AUM (vs 0.2% for FY12). Given the slowdown in economy and higher share of high yielding assets, we expect the write-off ratio to move up.

m  Widening product portfolio: Magma’s key attraction has been its very well diversified loan portfolio, which has helped the company manage healthy growth rate. Continuing the focus on diversification, Magma is now foraying into housing loans (through a separate subsidiary), gold loans on the credit side and will begun selling general insurance products shortly. Magma has already received in-principal R2 approval for its foray into the general insurance business.

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. Moreover, Magma would be a key beneficiary of reversal in interest rates due to its reliance on whole-sale funding and large part of loan carrying fixed interest rate. At its current multiple of 0.9x FY14E BVPS, Magma trades at a significant discount to its peers and factors in potential risks amply. We reiterate Buy and maintain the price target of Rs 101 (based on 1.3x FY14 BVPS).

Thanks & Regards,