Magma Fincorp: Results in line, high yields support earnings even as NPLs rise :: Kotak Sec, report

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Results in line, high yields support earnings even as NPLs rise. Magma reported a strong topline due to its shifting focus on high-yield businesses, even as losses in the CV/CE segment did not abate. While the new focus segments viz. used assets, SME (unsecured) and tractors are cyclical as well, the company has been able to maintain high collections in these businesses. We expect a gradual improvement in Magma’s performance on stronger earnings and a moderation in credit cost over the next few quarters. We revise estimates and retain ADD with a price target of `135 (no change).


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Magma Fincorp Steady growth, better NIM and productivity; Buy:: Anand Rathi

Key takeaways
Steady credit growth continues. While Magma’s overall AUM grew
27.8%, adjusting for the buyout of its mortgage portfolio, its AUM grew
20% yoy (3.8% qoq), led by robust disbursements in the utility vehicles,
tractor and used-CV divisions. Disbursements have slowed down on
account of negligible fresh lending to the higher-ticket CV and CE
segments; however utility vehicles, tractors and used CV growth is healthy.
We expect steady loan growth (a 25% CAGR in FY13-16) to continue,
driven by a diversifying product-mix and deeper rural penetration.
NIM improvement continues on larger share of high-yield assets.
Calculated NIM (on AUM), at 5.2%, was 80bps higher yoy (10bps lower
qoq), led by the greater share of high-yielding assets like passenger vehicles
(31%) and tractor finance (13%) in its AUM (up from a combined 39% a
year ago). With the product mix tilting more towards higher-yielding assets,
we expect further NIM expansion of 20bps over FY14-15.
Asset quality slips on stress in CE and CV. The NBFC has tightened its
NPA-recognition policy and recognizes NPA on 120 days overdue (from
180 earlier) according to the RBI’s draft recommendations. As a result
GNPA increased 33.3% qoq. Collection efficiencies, too, declined to 95.5%,
but are likely to improve. Further, the NBFC has raised standard-asset
provisioning to 30bps (from 25bps earlier). We expect some pressure on
asset quality given the challenging macro environment, and have built in
higher credit costs than those seen in the past.
Our take. We reduce FY14/15 PAT 4.8%/2.8% due to higher credit costs.
We expect the robust loan growth, improving NIM and better productivity
to lead to the RoA expanding to 1.9% by FY16 (from 1.3% in FY13). We
maintain a Buy. At our target the stock would trade at 1.3x FY14e and 1.1x
FY15e BV. Our target is based on the two-stage DDM (CoE: 18.5%; beta:
1.2; Rf: 8%). Risk. Higher-than-expected credit cost

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.

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.

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.

Magma Fincorp -We cut estimates & price target due to lower NII, but retain a Buy:: Anand Rathi

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Magma Fincorp
We cut estimates & price target due to lower NII, but retain a Buy


On lower net interest income, Magma’s 3QFY12 net profit fell 63.3%
yoy to `113m. We cut our estimated EPS for FY12, FY13 and FY14 by
~29%, 14.2% and 12.1%, respectively, due to lower NII, given MTM
forex losses on borrowings and subdued securitization in FY12 (with
consequent higher cost of funds). We lower our price target from `80 to
`73, yet retain a Buy as we expect improved FY13/14 profitability to
drive up valuations.
 Reported PAT declined 63% yoy to `113m mainly due to lower net
interest income. However, comparable proforma PAT (consistent
accounting policy and same off-book loan proportion to AUM) for
9MFY12 was `1.1bn, vs. `772mn in 9MFY11, up 48.5% yoy.
 Net interest income declined due to one-offs. NII was pulled down by:
1) changes in accounting policy for securitization income, 2) MTM forex
losses of `50m on preference debt, 3) back-ended loan growth during the
quarter (lower earning yields) and, 4) lower securitization activity and rising
interest rates pushing up cost of funds. We expect softening interest rates
and higher securitization in 4QFY12 to lead to better net-interest-income
growth than in 3QFY12 (but, lower than our earlier estimate).
 Business growth and asset quality continue robust. Disbursements
grew 50% yoy in 3QFY12, to `19bn and the share of high-yield loans was
25% vs. 23% in 2QFY12. Asset quality is robust, with collection
efficiency of 100% in 9MFY12 and credit cost at 0.22% of average AUM
(the lowest since FY07).
 Valuation. We expect return ratios to improve on higher securitization
income in FY13/14, driving valuations up. At our revised price target of
`73, the stock would trade at PBV of 1.3x FY12e and 1.1x FY13e.
Risks: Economic slowdown and thereby slower loan growth and high NPAs;
regulatory changes.

Magma Fincorp: Q3FY12 Result Update: Centrum

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Mixed performance
Magma’s Q3FY12 numbers reflect significant pressure on profitability though
disbursement growth remains strong and asset quality has held up well. It
should be noted that the recent change in accounting policies renders YoY
comparison inconclusive and misleading. We retain Buy rating on attractive
valuations with a revised price target of Rs101 (based on 1.3x FY14 BVPS).
􀂁 Strong disbursements growth momentum continues: Disbursements in
Q3FY12 grew by a strong 50% Y-o-Y led by a jump in lending to the Cars &
Utility segment and consistently strong growth in high yielding segments. The
mix of the high-yielding assets increased to 25% in Q3FY12 vs 22% in Q3FY11.
The strong growth in Cars & Utility segment, despite moderation in overall
auto sales volumes in recent months, stems from Magma’s 1) rural and semirural
focus where demand remains healthy and 2) new branch additions.
􀂁 Spread remains under pressure: Reported NIM remained under pressure (at
~4.3% in Q3FY12) led by a sharp jump in cost of funds which largely offset the
improvement in blended yields. Interest expenses include MTM forex losses of
Rs50m on preference debt. From a funding source perspective, the
management is making conscious effort to reduce reliance on the banking
system, which remains the chief source of funds. Importantly, Magma’s credit
ratings were upgraded recently and this should accrue benefit in terms of
competitive cost of funds over the medium term.
Y/E March (Rsmn) Q3FY12 Q3FY11 % YoY Q2FY12 % QoQ
Total Income 2,782 2,254 23.4 2,519 10.5
Interest Expended 1,758 968 81.6 1,447 21.5
Total Operating Exp 2,484 1,698 46.3 2,130 16.6
Pre-provisioning Profit 298 556 (46.4) 389 (23.4)
Provision for Std assets 25 0 20 27.6
Bad Debts w/o 67 70 (4.2) 67 (0.6)
Operating Profit 206 486 (57.7) 302 (31.8)
Profit before tax 206 490 (58.1) 302 (32.0)
Tax 67 163 (59.2) 90 (25.5)
PAT (before minority) 139 327 (57.5) 213 (34.7)
Source: Company, Centrum Research
􀂁 Collection efficiency at 100.4%: Collection efficiency remains strong at
100.4% for Q3FY12 giving us significant comfort considering the challenging
operating environment. Strong collection efficiency and healthy credit quality
of the book helped contain the write offs (flattish QoQ). The write-off ratio for
Q3FY12 stands at 0.23% on annualized basis. While the CV industry is facing
immense challenges in terms of rising costs and declining margins, Magma
continues to display strong collection efficiency (101.2%) in the segment.
􀂁 Earnings Revision: We have lowered our earnings estimates for FY12
(by ~40%) and FY13 (by ~25%) to account for significant pressure on
profitability and potential asset quality risks arising from increasing share of
high yield loans as well as difficult operating environment over the medium
term.
􀂁 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 0.8x FY13 BVPS, Magma trades at a
significant discount to its peers and factors in potential risks amply. We
reiterate Buy with a revised price target of Rs 101 (based on 1.3x FY14 BVPS).

Magma Fincorp- Improvement in profitability underway; Buy :: Anand Rathi Research

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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.

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.

Magma Fincorp -Turning the corner:: IDFC Securities

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Magma Fincorp (Magma), with two decades of lending experience in CVs, cars and construction equipment in tier II/III
towns, has built a profitable business model. While a pan-India network reduces geographic concentration risk, entry into
high-yield segments of tractors, SMEs and used CVs has expanded the addressable market. Also, Magma’s focus on
under-serviced buyers in under-banked regions ensures elevated yields. Magma has developed sound collection
efficiencies to protect its asset quality – evident in low credit cost of 0.3% (on AuM) as of FY11. Hereon, we expect Magma
to scale up rapidly by leveraging the existing network and adding branches. Disbursements are expected to show a robust
38% CAGR which, with lower securitization, would lead to 52% CAGR in advances over FY11-13E. This, and expanding
margins led by rising share of high-yield products and likely capital infusion in FY12, would spur 39% CAGR in NII. At 1.2x
FY12E BV, the stock trades at a deep discount (25-55% to peers). Given Magma’s high growth and profitability potential,
we initiate coverage with Outperformer and an 18-month price target of Rs120 (1.8x FY13E BV). Any changes in regulations
and increased competition pose key risks.
A resilient business model: Pan-India footprint, a diverse product portfolio and efficient business processes are the key
strengths of Magma’s business model. With its focus on rural and semi-urban first-time customers (80% of branches in
these areas), and limited competition from banks, Magma is aligned to grow in line with a buoyant rural economy. The
efficacy of business model is reflected in high collection efficiency and low credit costs.
Business to gain scale; focus on high-yield loans: Magma is looking to grow its loan book by leveraging the existing
network as also adding new branches. A strong 38% CAGR in disbursements and a decline in securitization to 35% of AuM
by FY13E, we believe, would drive 52% CAGR in advances over FY11-13. While yields are indeed prone to competitive
pressure, a prudent tempering of mix towards riskier but high-yield business lines would keep spreads intact (4.7% over
FY11-13E). However, traction in these business lines could lead to an increase in provisioning expenses to 0.6% of AuM by
FY13 up from 0.3% in FY11.
Traction in earnings; stock attractively priced: Strong NII momentum and improved operating leverage are expected to
drive 41% earnings CAGR for Magma over FY11-13, with steady RoA of 2.4% by FY13E. Despite a likely equity dilution of
Rs4bn in FY12 (factored into our estimates), we see Magma generating a sustainable RoE of 20%+. At attractive valuations
of 1.2x FY12E P/BV, the stock offers significant upside potential.

Magma Fincorp:: Results beat expection…..Padmakshi

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Results beat expection…..
MFL reported a robust growth in operating profit of 44% yoy and Net
profit of 71% yoy in FY11 which is better than expected backed by
better than expected growth in disbursement, Net interest income and
improved asset quality resulting lesser write offs. We expect company
to continue to grow at this pace.
Business growth continues…..
MFL has witnessed a strong growth in disbursement of 33% yoy in
FY11 and 41% yoy in FY10 with CAGR growth of 26% over FY05-11.
We expect MFL to continue to grow at 30% for FY12 with a CAGR of
29% in FY11-13E.
NIMs remain stable
NIMs for FY11 stood at 5% as compared to 5.1% in FY10. This is due
to increase in interest rates in last fiscal. We expect further rise in interest
rates in the current quarter and to stabilize in 2HFY11. NIMs to remain
at 5.1% for FY12E and 5.2% in FY13E.
Highest efficiency till date resulting in lower write offs
Collection efficiency has toughed historic high at 102% in FY11 as
compared to 100% in FY10 and 98% in FY11 and improvement in asset
quality with write offs at 0.24% for FY11 vs 0.46% in FY11.
Improved return profile
ROAA has improved to 2.3% in FY11 and ROAE to 26% as compared
to 1.8% and 22% in FY11. This is due to strong growth in bottom line of
71% yoy in FY11 and 70% in 4QFY11.
Adequately capitalized
Capital adequacy stood at 18.2% in FY11 which is above the norms of
RBI. We expect the company to raise capital in FY12 to support the
targeted growth.
Valuation and Outlook
After factoring an overall consistent performance in terms of
disbursements, collection efficiency, stable margins and asset quality,
we believe MFL to continue to grow at 30% yoy in FY12 with CAGR of
28% in FY11-13E. At CMP of Rs 71, the stock is trading at 1x its
FY12E book value of Rs 69 and 7.6x its FY12E diluted EPS of Rs 9.4,
we expect the stock to trade at 1.4x its FY12E BV. Hence we
recommend to BUY the stock with the target of Rs 97.

Magma Fincorp: Buy; Target: Rs106; Margin pressure visible, asset quality robust :: Centrum

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Margin pressure visible, asset quality
robust
Magma reported strong Q4FY11 numbers with PAT surging
70% YoY to Rs449mn, helped by strong disbursement growth
and lower credit costs. While we are factoring in NIM erosion
over FY12 due to adverse interest rate environment, we expect
higher growth in high yielding segments to act as a hedge. We
peg NIM at 5.7% for FY12, a contraction of 20 bps yoy. It
should be noted that this NIM is not comparable with the one
reported by the company, due to difference in base.
Considering the significantly above expected result, we are
revising our estimates upwards. We maintain our Buy
recommendation and target price of Rs106.

Magma Fincorp, MGMA IN,:: HSBC - India Investor Conference Highlights

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High yield product contribution to build to 25-30%
 Customers are screened on their ability to make payments in the first 18 months. After that, the customer's equity is greater
than the company's equity, and so it is assumed that the customer will pay.
 Has offices at 172 locations across the country and expects to reach 240 by 2014. 80% are in semi-urban and rural regions,
which is a niche segment of the company. The loan book is 100% retail. Average ticket size of loan is INR7lacs.
 There are multiple filters for each loan to go through, including one which includes soft feedback in which the local
executive goes personally to the customer's location to get details.
 Industry practice is to make collections every 3-6 months, but Magma collects monthly.
 Competition is largely from companies like Sundaram Finance, Shriram Transport, Tata Finance rather than banks.
 Funding sources are working capital limits from banks, securitisation, and term loans/bonds/debentures.
 NIM is at 5.1% in the first 9 months. NIM has dropped from Q2 to Q3 due to higher cost of funds.
 Increased contribution of high yielding products to 19% from 9% in FY09 and 13% in FY10. Expects to increase it to 20%
by end FY10 and further target to increase to 25% by FY11 and 30% by FY12.

MAGMA FINCORP :: IDFC Emerging Stars Conference

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MAGMA FINCORP 
UNRATED (RS63, MCAP: RS8.2BN / US$183M)


• Magma, headquartered in East India, is an NBFC providing finance across diverse product segments – commercial
vehicles, construction equipment, cars, utility vehicles, tractors and SME loans. Magma operates mainly in rural and
semi-urban regions, which account for ~80% of its branches. Magma has created a strong position for itself, especially
in equipment and vehicle financing space, led by two factors: 1) little or no availability of banks and formal lending
institutes in its focus areas; and 2) focus on first-time buyers and small entrepreneurs.
• Strong growth ahead: The management expects strong loan growth of ~40% in FY12, driven by: i) strong industry
demand in CVs (20-25% growth), cars (30-35% growth) and construction equipment (rebound expected); ii) expansion
of branch network (200 branches by FY12, v/s 153 in FY10); and iii) increased availability of all products at the existing
branch networks. Magma reported 43% yoy and 12% qoq growth in disbursements in Q3FY11.
• Proportion of high yielding assets to increase: The company aims to increase the proportion of high yielding
products (tractors, used vehicles and SME loans) to ~25% in FY12, up from 13% in FY10. Increase in high-yield loans
would help Magma sustain margins in a rising interest rate environment. High yielding loans constituted 22% of
disbursements in Q3FY11, compared with 13% in Q3FY10.
• Margins to remain stable: Despite the rise in funding costs, the management expects margins to remain stable at 5.1 -
5.2% over the next few quarters as; i) continued growth in high yielding loans are expected to support margins; ii)
~75% of the book qualifies as priority-sector loans, and a huge demand by the banking systems for PSLs in Q4 would
help Magma negotiate superior rates.
• Superior collection efficiency: Magma has a collection efficiency of 100%, which has helped it maintain a low writeoff
ratio (write-off to total assets) of ~0.4%. Magma has segregated its business generation vertical from the credit
appraisal vertical, which has helped it contain delinquencies in this risky segment. Magma witnessed no NPAs on its
books in the past five years due to its prudent accounting policy – all contracts with more than 180 days past due are
treated as loss assets and are written off as bad debt.
• Funding mix: A PSL status of ~60% and consistent investment grade ratings of its debt instrument have provided
Magma adequate and continued financing lines. Currently, ~50% of Magma’s funding needs are financed through
working capital loans. Securitization has also been effectively used to enhance the company’s funding base. However,
with other lines of funding gaining scale, the management expects the share of securitization to decline to ~25% of
loan book by FY12 ( ~40% currently).