Magma Fincorp : BUY

Strong Profit Growth

Magma FinCorp (Magma) maintained its strong growth trajectory in 4QFY11 driven by robust growth in interest income (25% QoQ to Rs 253 cr) and lower write-offs (Rs 24.6 cr in 4QFY11 vs. Rs 40 cr in 4QFY10). PAT rose 69% YoY and 39% QoQ to Rs 43 cr which includes Rs 10.9 cr of provision for standard assets. On-book AUM grew 35% YoY to Rs 4,280 cr as on March 11 which now comprise 46% of total AUM (40% in March 10). Going forward, management expects similar growth trend (50% disbursement growth) with focus on high yielding products (HYP) which will keep their NIMs at above 5%.

Key highlights

ü  Disbursement grew 41% YoY and 53% QoQ to Rs 1,955 cr mainly driven by Cars & UV (80% YoY growth and 26% share) and HYP segment (111% YoY growth and 18% share).

ü  NIM (on incremental biz) maintained at 5% and mgmt has guided for 5.25% in FY12. However, mgmt does not expect its cost of funds to come down (9.1% in 4QFY11) from current levels.

ü  Magma maintains a capital adequacy ratio of 18.2% (Tier 1 ratio of 11.3%), which is above the regulatory requirement of 15%.

Valuation

Magma continues to impress with robust business growth, lower write- offs (0.24% of AUM), sustained NIMs (5%) and healthy PAT growth. Magma, in-line with its guidance, is consistently reducing its share of securitized portfolio (~54%) and is aiming to bring it down to ~30% by FY13E. Keeping this in mind, we expect that the company may need to raise capital in near term in order to grow its On-book AUM. At CMP of Rs 70, it is trading at 5.6x FY12E EPS of Rs 12.6 and 4.0x FY13E EPS of Rs 17.4. On P/ABV it is trading at 1.2x FY12E ABV of Rs 60 and 0.9x FY12E ABV of Rs 79. On the back of its consistent improving performance BUY with a target price of Rs 86 (1.4x FY12E ABV).