Magma Fincorp - Strategic reorientation and consolidation continues - ICICI Securities

Magma Fincorp's (Magma) Q2FY21 earnings were characterised by focused collection efforts (90% efficiency by October), further build-up of provisioning buffer (cumulative 1.5% of AUM) and cost control (costs down 70bps of AUM). PAT of Rs381mn, flat QoQ and up 30% YoY, was ahead of our expectations led by better NII and lower opex. Strategically, Magma has stopped sourcing low-RoA products - namely new cars, CV, CE, etc. - and will deploy the capital release towards high yielding focused products (used assets, tractors, housing). This will lead to balance sheet consolidation and modest AUM growth for 12-18 months, Also, in housing finance and general insurance, Magma is looking at unlocking opportunities. Strategic business reorganisation continues, which will cap growth and RoE profile. Maintain HOLD with a revised TP of Rs 40 (from Rs33) with earnings and consequent book value revision.

- Strategy reorientation continues; vehicle finance model directed towards focused products: Disbursements saw an uptick to Rs8.3bn (vs Rs2.2bn in Q1FY21 and Rs10bn in Q2FY20). However, vehicle finance portfolio is being reshaped towards high-RoE focused products with more than 95% incremental disbursals comprising used vehicles, affordable housing finance, SME loans and tractors. Company has stopped sourcing low-RoA products like new cars, CV and CE and consequently AUM ran down 2% QoQ and 5% YoY to Rs156bn. Focused product AUM still witnessed 3% YoY growth to Rs110bn (constituting 70% of total AUM). The current non-focused AUM run-off is envisaged to release equity capital of over Rs4.7bn by Mar'22, which will be deployed to grow the focused products business. Resultant change in mix will keep AUM growth modest though it might boost the NIM, RoA and RoE profiles.

- Collection efficiency at 90%; contingency buffer at 1.5% of AUM: Collections have reached overall efficiency of 85% in Sep'20 and 90% in Oct'20. Customers in the standard bucket, who availed of moratorium of at least one EMI and have not paid their Sep'20 EMI, account for Rs15bn (9.6% of AUM); those who have not paid Sep'20 and Oct'20 EMIs account for Rs6bn (3.8% of AUM). One-time restructured portfolio as at 30th Sep'20 was Rs830mn (0.5% of AUM) and is unlikely to go beyond 3% of AUM by FY21-end. Magma made additional provision of Rs900mn in Q2FY21 taking cumulative contingency provision to Rs2.4bn, or 1.5% of total AUM. Coverage on stages-1&2 assets was increased to 3.0% in Q2FY21 (2.5% in Q1FY21). Management has highlighted that this is sufficient to cover any spike in NCL or NPL in H2FY21. Gross stage-3 declined to 5.1% (from 5.8% in Q1FY21) and net stage-3 was down to 3.2% (3.7%). We are building-in credit cost of 2.7%/2.3% for FY21E/FY22E.

- Cost control to the extent of 70bps of total AUM: Operating expenses were contained (down 2% QoQ / 22% YoY) with 'opex to AUM' ratio settling at 3.4% (vs 4.1% in Q2FY20). Magma expects 70bps reduction in opex, of which 40bps is sustainable due to structural changes undertaken, whereas 30bps may come back with return of normalcy, which is expected by Q4FY21.

- Other group businesses: Magma Housing Finance (MHFL) has initiated actions for raising capital for growth. Magma intends to keep prospective investors' preferences in mind while finalising the reorganisation structure for MHFL. PAT was flat YoY at Rs140mn after an additional Covid provision of Rs70mn. AUM grew by 8% YTD and 23% YoY to Rs35bn. Magma HDI has received strong investor interest for participation in a capital raise process; it is engaging with a few interested parties and hopes to have firm commitments in the foreseeable future.

Shares of MAGMA FINCORP LTD. was last trading in BSE at Rs.47.5 as compared to the previous close of Rs. 47.25. The total number of shares traded during the day was 42732 in over 345 trades.

The stock hit an intraday high of Rs. 48.2 and intraday low of 46.9. The net turnover during the day was Rs. 2027759.

Source : Equity Bulls

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