Thursday, May 3, 2012

>MAGMA FINCORP: Q4FY12 Result update

In line with estimates

Magma’s Q4FY12 numbers, in-line with our estimates, reflect continued pressure on profitability though disbursement growth remains healthy 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 and price target of Rs101.
 Disbursements growth momentum slows but healthy: Disbursements in Q4FY12 grew by a healthy 28% YoY (though slower than 50% in Q3) with the Cars & Utility segment (48% YoY) and high yield assets (up 71% YoY) driving this growth. The mix of the high-yielding assets was stable QoQ at 25% in Q4FY12. 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.

 Spread stable QoQ: Reported spreads for Q4FY12 at 4.3% are stable QoQ, despite 30bps contraction in asset IRRs, as cost of funds came down in sync. The contraction in asset IRRs can be traced to 1) higher strategic CE disbursals and 2) shift in loan mix. 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. For FY13, the spreads should improve as banks have begun cutting base rates and liquidity should be relatively better than FY2012.

 Collection efficiency at ~101%: Collection efficiency remains strong at 101% for Q4FY12 giving us significant comfort considering the challenging in operating environment. Strong collection efficiency and healthy credit quality of the book helped contain the write offs (at 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 from the current level. In line, this should keep the credit costs stiff at ~85bps during FY13.

 High earnings growth ahead: Based on management’s views, if we exclude the impact of change in accounting policies during FY12 the proforma PAT stands at Rs1550mn (vs Rs780mn reported), which implies a growth of 27% YoY. For FY13, we expect Magma to report an impressive growth at bottomline level led by the fact that YoY comparison will now be possible. 

 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 FY14 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).