Magma Fincorp is a Buy – Nirmal Bang Research Report

Magma Fincorp Ltd. (Magma) is pan India NBFC engaged in the business of financing across the assets classes across the various geographies in India. It has a diversified portfolio consisting of cars and utility vehicles (UV), commercial vehicles (CV), construction equipment (CE), tractors (Agri), used vehicles, SME businesses and mortgage finance, Housing Finance and in addition to this Magma is engaged in General Insurance business.

magma fincorp

Investment Rationale:

Earlier during 2012 and 2013, Magma aggressively expanded its presence both in term of branches and employees. But due to two consecutive weak monsoons and slowdown in rural economy growth momentum could not sustain. However the demand in rural economy is picking up and with expectations of normal rainfalls this year the growth is likely to rebound. In addition to this Magma has changed the business processes internally with the clear focus on growth and quality of book.

Historically Magma has limited exposure to Car, CV and CE financing which was low yielding business. However the company has diversified in last three years to high yield portfolios which contributes 61.6% in FY17 as compared to 42.5% in FY14. This strategic change has led to improved profitability. Magma has implemented better credit monitoring systems and is now doing business under predefined frame work which is leading to minimal credit losses from the new business under this strategy. And by FY18E almost 70-75% of the book will be under this mechanism.

Net Interest Margins for the company are improving steadily over the years led by better mix of high yielding assets and efficient liability profile. We have projected NIMs at 7.5% for FY1 9E.

Valuation and Recommendation:

We initiate coverage with a BUY rating on Magma Fincorp Ltd. with target price of Rs. 183 (1.7x FY19E book value) implying an upside of 30% from current levels.

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