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

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.

Source : Equity Bulls

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