>MAGMA FINCORP: Trades at a significant discount to its peers and factors in potential risks amply

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.


■ 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).




To read the full report: MAGMA FINCORP
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