Magma Fincorp - Ahead of our estimates - Ambit

Results overview: In 3QFY13, Magma's post provisioning operating profit was at Rs564mn, up 174% YoY and 33% QoQ (29% above our estimates). Magma's net interest income was in line with our estimates, because loan growth was in line with our estimates. However, pre-provisioning operating profits and post provisioning profits were 23% and 19% above our estimates primarily due to noncore income being 300% above our estimates.

The QoQ increase of 33% in core operating profit was primarily driven by a 10% QOQ increase in average earnings assets. The 14bps decrease in opex/AUM ratio was offset by 12bps decrease in NIMs.

Magma continued its loan growth momentum with 30% loan growth primarily driven by robust growth in the cars/UVs segment and high-yield portfolio of used CVs, tractors and SME loans. NIMs declined by ~12bps QoQ to 5.4%. Operational costs offered some relief, as opex/AUM ratio decreased by 13bps QoQ but it increased by ~57bps YoY to 3.43%.

Credit costs (ex-provisions on standard assets) remained steady at ~50bps of AUM despite a slight decline in collection efficiency, as the company changed its NPA classification and provisioning norms by: (i) recognising its NPAs at 120dpd in contrast to the earlier practice of 180dpd; (ii) providing for NPAs at rates ranging from 15% to 100% depending on different time buckets in contrast to the earlier practice of writing-off the asset completely (100%) irrespective of NPA ageing, and (iii) increased provisioning for standard assets from 0.25% to 0.3%. Adjusting for these changes in accounting policies, the credit costs (ex-provisions on standard assets) would have been higher by 14bps at 0.64% of AUM, NIMs higher by 23bps at 5.62%, and PAT lower by 1.1% at Rs332mn. After factoring in the changes in the accounting policy, PAT is 26% ahead of our estimates vs 24% on the basis of unadjusted numbers.

Where do we go from here? Whilst Magma's loan growth has held up well over the past one year, RoAs have been at sub-1% levels, due to declining NIMs over the past one year. Going forward, we expect NII growth to remain robust at ~50% in FY13 vs FY12, driven by the increasing share of interest earning assets in total AUM and expansion in margins as the rate cycle turns. Maintaining credit quality going forward along with ramping up the high-yield loans segment would remain key drivers for MGMA's RoAs and RoEs to reach 2% and 15%, respectively, over the next couple of years. We maintain our BUY stance with a target price of Rs80/share (implied FY14 P/B of 1.1x and 17% downside), which would be under review after the earnings call today.

Source : Equity Bulls

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