Robust performance Magma :: Centrum

Robust performance
Magma’s Q3FY13 numbers reflect continued robustness in disbursement
growth (even as individual industries report moderation) driven by high yield
segments and Cars & UVs. However, the rising share of high yield loans (34%
now) along with seasonality pushed the collection efficiency down to 97%
and in line write offs remained at 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 improving return ratios with a revised price target of Rs115.
Disbursements growth moderates: Disbursements in Q3FY13 moderated
dramatically to 20% YoY, compared with 45% growth registered in Q2FY13.
From a product perspective, weaker demand in CE & CV segments were the
primary reason for the moderation while Cars & Utility segment (35% YoY)
and high yield assets (up 62% YoY) continued to report healthy traction. The
mix of high-yielding assets improved further to 34% from 23% a year ago.
Spread improves QoQ led by shift in loan mix: Reported spreads for Q3FY13
at 5.43% indicated an improvement of ~50bps QoQ, primarily led by better loan
mix and partly due to securitization done during the quarter. The increasing
share of high yielding segments coupled with usage of securitization as a
funding tool should help Magma sustain NIMs at current levels.

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Collection efficiency declines to 97.8%: Collection efficiency dipped further
QoQ to 97.8% for M9FY13 – implying even lower 97% collection efficiency for
Q3FY13. The dip in collection efficiency is primarily from CV and SE segments
though the tough recovery environment for financial companies in general
too played its role. Write-offs during the quarter remained stable at 0.48% of
AUM (vs 0.2% for FY12).
Proactive compliance of NPA recognition: On a proactive basis, Magma has
achieved compliance to the proposed revision to NPA recognition norms
(Usha Thorat Committee). Based on 120-day basis, Magma’s GNPA stands at
1.3% and NNPA at 1.1% without including written off amounts. In addition,
Magma has adopted an aggressive provisioning policy to ensure adequate
cushion for asset quality shocks.
Capital raising plans revealed: Magma’s board of directors have approved
equity capital raising of Rs500 crores. The current Tier I stands comfortable at
11.1% with likelihood of improvement during Q4FY13 depending on the extent of
securitization. The company is yet to clarify on the mode of capital raising.
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 because a large part of loan carries fixed interest rate.
While the stock has rallied recently, current multiple of 0.3x FY14E BVPS still leaves
16% upside to our revised target price of Rs115. We reiterate Buy.