Magma Finance - Diversifying product, inexpensive valuations - Anand Rathi

- Magma has diversified its product profile over the last two years. Tractor and used CVs now form 36% of its vehicle portfolio compared to 29% two years ago

- The NBFC underwent a change in accounting norms, which led to RoAs dipping to 0.5% in FY13. Since then the RoA has improved to 1.3% in 9MFY14 .This would stabilize at 1.6% in FY16

- NIM is likely to improve given the increasing share of higheryielding assets such as tractors and SCVs. The NBFC heavily depends on banks for financing and is more sensitive to favorable interest-rate movements

- While asset quality has deteriorated, GNPA at 1.7% is lower than peers. A more conservative NPA recognition policy is likely to keep credit costs higher than in the past

- At our price target of Rs. 89, the stock would trade at 1.0x FY15e and 0.8x FY16e BV. Our target is based on the twostage DDM. (CoE: 18.5%; beta: 1.2; Rf: 8.5%). Risks: Rural slowdown, leading to higher-than-expected credit cost and lower-than-expected growth.

Source : Equity Bulls

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