Magma Fincorp - Q2FY13 Result Update - Centrum

Q2FY13 Result Update

Magma Fincorp

Buy

Target Price: Rs101

CMP: Rs66          

Upside: 53%

Spreads improve

Magma’s Q2FY13 numbers reflect continued robustness in disbursement growth (even as individual industries report moderation) driven by high yield segments and Cars & UV segment. However, the rising share of high yield loans (29% now) along with seasonality pushed the collection efficiency down to 98.1% (though still quite healthy) and in line write offs inched up to 0.48%. 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 traction continues: Disbursements in Q2FY13 grew by a strong 45% YoY, in line with 44% growth registered in Q1FY13. From a product perspective, Cars & Utility segment (63% YoY) and high yield assets (up 84% YoY) drove this growth. The mix of high-yielding assets improved further to 29% from 23% a year ago. The strong disbursement growth is commendable in the light of the fact that at the macro level each industry segment witnessed moderating growth trends.

m  Spread improves QoQ led by shift in loan mix: Reported spreads for Q2FY13 at 4.9% indicated an improvement of 40bps QoQ as cost of funds dipped by 30bps and asset IRRs expanded by 10bps 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. Meanwhile, contraction in cost of funds reflects benefit of easing wholesale funding costs.

m  Collection efficiency declines to 98.1%: Collection efficiency dipped further QoQ to 98.1% from 98.3% in Q1FY13, partly led by seasonality influences and increased share of the high yielding segment as well as tough recovery environment facing financial companies in general. In line, write-offs during the quarter also jumped to 0.48% of AUM (vs 0.2% for FY12). We expect the collection efficiency to look up in H2FY13 as borrower cash-flows should improve driven by a pick up in economic activity. In turn, this should normalize the write offs.

m  Widening product portfolio: Magma’s key attraction has been its very well diversified loan portfolio, which has helped the company manage a healthy growth rate. Continuing the focus on diversification, Magma has launched its gold loan business with strong traction likely to materialize in FY14. The general insurance JV too is operational after product launch in Oct’12. With costs already built in, strengthening of these new revenue streams should improve productivity and cost-income ratio from FY14 onwards. 

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 clear focus on containing risks. Moreover, Magma would be a key beneficiary of reversal in interest rates due to its reliance on wholesale funding and large part of loan carrying fixed interest rate. Current multiple of 0.9x FY14E BVPS, indicates significant discount to its peers and does not fully appreciate the diversified portfolio and strong hold on asset quality. We reiterate Buy and maintain the price target of Rs 101 (based on 1.3x FY14 BVPS).

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