Magma Fincorp - initiating coverage-Jul-13-EDEL Magma, over the years, has built a diversified,...
Transcript of Magma Fincorp - initiating coverage-Jul-13-EDEL Magma, over the years, has built a diversified,...
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Edelweiss Securities Limited
Magma Fincorp (Magma) strengthened itself by strategically diluting its
auto loan focus (down to <70% from 95% in FY09) and building a diversified
and scalable business model. Accounting changes induced earnings
volatility is now a thing of the past. The company is geared to graduate to
the next level—improve RoA trajectory to 1.3% (for standalone entity on
earning assets including assignment) and RoEs to >15%—led by NIM
expansion (particularly yield enhancement). Improving and sustainable risk
adjusted return profile can re-rate the stock to 1.4x FY15 consolidated
book. We initiate coverage with ‘BUY’ and TP of INR133 (47% upside).
Multiple levers to boost RoEs to >15% by FY15E
Magma’s RoE profile was weak in FY12/13 (at (<10%) due to regulatory/accounting
changes pertaining to off-balance transactions. The company, however, reduced
reliance on such transactions from as high as 70% (FY06-09) to ~32% in FY13, which led
to sharp dip in NIMs below 4%. The strategy to normalise RoEs to >15% will be led by
NIM improvement. Currently, it has multiple levers at hand to improve yields: (i) rising
share of high yield products (mortgages, gold loans, tractors, used CV); (ii) unamortised
securitisation income; and (iii) run-down of loans originated in FY11 at lower yields.
Productivity ratios to improve as businesses gain scale
Common infrastructure, branch network and customer segment provides enough
scope for productivity improvement (AUM/employee at INR20mn is 20-30% lower than
peers) led by scale up of newly launched businesses. While Magma’s opex/AUMs at
3.3% is at par with peers, cost-to-income appears high at 65% due to weak income
profile. NIM improvement to 5.8% will cut the ratio to 53%. Though credit cost
(<50bps) is best in class, we are building in higher credit cost of 120bps in FY15E
anticipating increase in provisioning coverage to 50% and overall system-wide stress.
Outlook and valuations: Re-rating on cards; initiate with ‘BUY’
Magma, over the years, has built a diversified, scalable and profitable business model.
Down playing the company’s inherent business strength, the Street values the stock at
<1x FY15E book (consolidated), a steep discount to peers, owing to weak RoE profile in
FY12/13. Improving/sustainable return profile (RoA/RoE of >1.3%/15%) can re-rate the
stock to 1.4x FY15E book, implying a TP of INR133. We initiate coverage with ‘BUY/SO’.
INITIATING COVERAGE
MAGMA FINCORP Return to normalcy
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Medium
Sector Relative to Market Equalweight
MARKET DATA (R: MAGM.BO, B: MGMA IN)
CMP : INR 90
Target Price : INR 133
52-week range (INR) : 111 / 59
Share in issue (mn) : 190.0
M cap (INR bn/USD mn) : 17 / 280
Avg. Daily Vol.BSE/NSE(‘000) : 164.7
SHARE HOLDING PATTERN (%)
Current Q4FY13 Q3FY13
Promoters *
33.7 33.7 33.7
MF's, FI's & BK’s 12.2 12.5 13.6
FII's 43.7 43.5 42.3
Others 10.4 10.3 10.4
* Promoters pledged shares
(% of share in issue)
: 2.5
RELATIVE PERFORMANCE (%)
Sensex Stock
Stock over
Sensex
1 month (0.1) (2.4) (2.3)
3 months 5.7 16.3 10.6
12 months 11.3 43.7 32.4
Kunal Shah
+91 22 4040 7579
Click on image to view video
Nilesh Parikh
+91 22 4063 5470
Prakhar Agarwal
+91 22 6620 3076
India Equity Research| Banking and Financial Services
July 08, 2013
Consolidated financials
Year to March FY12 FY13 FY14E FY15E
PAT (INR mn) 740 1,391 2,118 2,889
Networth (INR mn) 11,015 13,974 15,695 18,117
Diluted EPS (INR) 3.9 7.3 11.2 15.2
Book value per share (INR) 58.1 73.6 82.6 95.4
Consol ROE (%) 6.9 9.7 13.0 16.0
P/E (Cons) (x) 23.1 12.3 8.1 5.9
Price/ BV (Cons) (x) 1.6 1.2 1.1 0.9
Banking and Financial Services
2 Edelweiss Securities Limited
Investment Rationale
Magma is a well-diversified (both product-wise and geographically) rural/semi-rural focused
retail non-banking financial company (NBFC) with consolidated AUM of INR162bn. We like
the company for its differentiated approach and diversified business model:
1) Differentiated operating structure ensures scalable business model: Laterally aligned
sales, credit and operation functions has resulted in reduced turnaround time and
healthy portfolio performance. Key characteristics: (i) well defined origination; (ii)
system driven, decentralised but standardised appraisal system; and (iii) bucket-based
collection process. As the company utilises common infrastructure, branch network and
customer segment for all product verticals (except for gold loans) there is enough scope
for productivity improvement (AUM/employee at INR20mn is 20-30% lower than peers)
led by scale up of newly launched/acquired businesses.
2) Product diversification to augment growth potential: Magma is strategically
diversifying away from CV/CE focus—the proportion is now down to less than 40% from
as high as 70% over FY06-10. It is developing a balanced risk profile within its overall
product bouquet – while key growth drivers will be high yielding tractors and used CVs
(now offered only from 50-60% branches), scale up of recently launched collateralised
products including mortgages and gold loans will also boost growth momentum.
3) Regional diversification to reduce concentration risks: Balanced AUM distribution
across states and regions—no state contributes >11% to AUM. A well diversified
approach will help minimise regional, local and single product concentration risks.
4) Multiple levers to boost RoEs to >15%: Magma’s RoE profile was weak in FY12/13 at
(<10%) due to regulatory changes pertaining to off-balance transactions. The strategy
to normalise RoE to >15% will be led by NIM improvement (particularly yield
enhancement). It has multiple levers at hand to improve yield: (i) increasing proportion
of high yielding products (mortgages, gold loans, tractors, used CV); (ii) unamortised
securitisation income; and (iii) run-down of loans originated at lower yields in FY11.
Fig. 1: Structural levels in place to improve RoE
Source: Company
Business
model strength
Product diversification
(9 product lines)
-To augment growth potential
(AUMs to post 21% CAGR)
Regional diversification
-No state contributes >11%
of AUM
-Reduced concentration risk
Multiple levers to boost RoEs to >15%
-Margin improvement (particularly
yield enhancement)
-Improved productivity
Differentiated operational structure
Laterally aligned credit & operation
functions; Bucket-wise collection
-Reduces turnaround time
-Healthy portfolio performance
Laterally aligned sales, credit and
operation functions have reduced
turnaround time and improved
portfolio performance
Strategy to normalize RoEs to >15%
would be aided by NIM
improvement, particularly yield
enhancement
Magma Fincorp
3 Edelweiss Securities Limited
Differentiated operational structure ensures scalable business model
Magma follows a differentiated laterally aligned operating structure, unlike other NBFCs,
which aids scalability, operating/cost efficiency and specialisation. The visible outcome of
this structure is reduced turnaround time to as low as 8-10 days and healthy asset quality.
Key characteristics of its operating structure include: (i) well defined origination; (ii) system
driven, decentralised, but standardised appraisal system; and (iii) bucket-based collection
process.
Fig. 2: Vertically aligned business model to aid scalability, cost efficiency and asset quality
Source: Company
Laterally aligned credit and operation functionality
Three critical functions, viz., sales (manned by 2,200 people), credit (350 member team) and
operations (500-600 members) are aligned laterally. Of the 231 asset finance centers (of
total 275 branches, 44 branches are gold loan branches and balance are asset finance
branches), sales and operations function from all locations, while credit facility is available
across 38 locations.
Sales manager initiates the loan proposal, which then goes to the collection function for
field investigation and operation function for documentation/CIBIL check. The report of
collection and operation function is forwarded to the credit division, which assesses the
customer’s credit profile (including cash flow analysis, income generating ability etc). The
entire process is system driven (in house Oracle based IT application) and typical turnaround
time is 8-10 days (from lead generation to payment). While field investigation takes place
within 48 hours, credit appraisal within 24 hours and one day for payment processing,
significant time is consumed by customers for document submission and evaluation.
Product-wise Verticals Collection Vertical Integrators
AFC HFC Gold Loans Insurance
0 dpd
1 - 60 dpd
61 - 180 dpd
ARD / LEGAL
SME
Based on Customer Behaviour Risk ManagementMarketing
Product-wise Functions
People ManagementStrategy
Technology Finance / Treasury
Sales
Product
Development
Credit Operations
Channel
Management
Key characteristics of its operating
structure include: well defined
origination; system driven,
decentralised, but standardised
appraisal system; and bucket-based
collection process
Banking and Financial Services
4 Edelweiss Securities Limited
Fig. 3: Well defined origination with decentralised but Chart 1: …results in reduced turnaround time
standardised appraisal…
Source: Company
Bucket-based collection vertical
Magma’s collection vertical is currently manned by a 3,300-member team and a ‘bucket-
based collection’ process is followed. The sales executive who initiates the proposal is
responsible for delinquencies during the first year of the contract. In the bucket-based
structure, different delinquency buckets (0dpd, 1–30dpd, 31–90dpd, 91–180dpd, 181-
730dpd, beyond 730dpd) are managed by different teams; the intensity of the follow up
increases as a contract slips into higher delinquency bucket. The robust collection
mechanism has enabled Magma achieve robust collection efficiencies even in stressful times.
Sales Team Sourcing
Operations TeamCIBIL/ check/
Customer history
evolution
Collection Team Operations Team
Field investigation-
conducts soft
checks on customer
Risk control unit-
ensure proper
documentation
Credit TeamTele-verification,
appraisal
Sales TeamPast sanction
processing
Operation TeamPayment
processing
Head Office Audit
Agreement
Execution
The collection vertical is currently
manned by a 3,300-member team
and a ‘bucket-based collection’
process is followed
8
11
13
16
18
21
FY10 FY11 FY12 FY13
(Da
ys)
Turnaround time
Magma Fincorp
5 Edelweiss Securities Limited
Chart 2: Collection efficiency managed well even during stressful times
Source: Company
A stringent provisioning policy: Accelerated adoption of RBI draft guidelines
Magma follows a stringent provisioning policy (compared to current RBI guidelines) and has
been prudent in moving towards RBI’s draft guidelines based on the Usha Thorat Committee,
limiting future impact.
Table 1: NPA recognition policy more stringent than RBI stipulated norms
Source: Company
Plagued by industry-wide stress in vehicle financing segment
The company too has been plagued by industry-wide stress in the vehicle financing segment
and GNPLs (based on 90-days past due) jumped from 1.8% in FY12 to 3.2% in FY13. However,
this is much below the run rate of 6.5% reported in FY10. We believe, 180-days’
delinquencies will be a more appropriate metric to evaluate considering Magma’s target
segment of under-served prime customers, self employed, first-time buyers where cash flow
streams tend to be more volatile—180-days’ GNPL has remained stable YoY in FY13 at 1%
(lower than 4.2% in FY10).
85.0
90.0
95.0
100.0
105.0
110.0
FY8 FY9 FY10 FY11 FY12 FY13
(%)
Collection efficiency
Delinquency past due Delinquency past due
Secured Unsecured Secured Unsecured
Standard 0 to 4 months 0.30% 0.30% 0 to 6 months 0.25% 0.25%
Sub-standard > 4 to 16 months 15% 25% > 6 to 24 months 10% 10%
Doubtful 1 >16 to 28 months 25% 100% > 24 to 36 months 20% 100%
Doubtful 2 >28 to 52 months 40% 100% > 36 to 60 months 30% 100%
Doubtful 3 > 52 months 100% 100% > 60 months 50% 100%
Loss 100% 100% 100% 100%
Magma's provisioning policy RBI's provisioning policy
180-days’ GNPL has been stable YoY
in FY13 at 1% (lower than 4.2% in
FY10)
Banking and Financial Services
6 Edelweiss Securities Limited
Chart 3: While 180 days’ GNPL remained stable, 90 days GNPL saw an uptick (an industry-wide phenomenon)
Source: Crisil
While delinquencies (180dpd) have been managed below 1% in car, CE, CV and SME
segments, they have been ~2.5% for used CV and tractors. In the home loan and LAP
portfolio acquired from GE, delinquencies (90dpd) are much higher than industry standards
at 9.2% and 12.6%, respectively. This is mainly due to constant run-down in GE portfolio
over last 4-5 years without any growth. Magma’s ability to reduce this delinquency at par
with industry average either through recovery or significant scale up will be critical.
Chart 4: Product-wise 90 day dpd (as on FY13) Chart 5: Product-wise 180 dpd (as on FY13)
Source: Crisil
Building in higher credit cost factoring in increased provisioning coverage and some stress
Going forward, we expect credit cost to inch up from the current level owing to
management’s increased focus on higher yielding products which are relatively more risky.
We are building in credit cost of ~120bps in FY15E anticipating increase in provisioning
coverage to 50% (from 20% at present) and factoring in system-wide stress. Key
monitorable will be SME lending—while it has been the best performing segment till date
(having gone through three cycles), entirely unsecured nature poses risk to delinquency.
1.0
2.8
4.6
6.4
8.2
10.0
Mar-10 Mar-11 Mar-12 Mar-13
(%)
90+ dpd 90+ dpd(1 year lagged)
3.2
1.0
6.4
5.9
2.5
3.9
1.7
0 2 4 6 8
Overall
SME
Tractor
Used CV
CV
CE
Car
(%)
0.0
1.2
2.4
3.6
4.8
6.0
Mar-10 Mar-11 Mar-12 Mar-13
(%)
180 + dpd 180+ dpd(1 year lagged)
We are building in credit cost of
120bps in FY15E anticipating
increase in provisioning coverage to
50% and factoring in system-wide
stress; key monitorable will be
unsecured SME lending segment
1.0
0.5
2.4
2.5
0.6
1.0
0.6
0.0 1.0 2.0 3.0
Overall
SME
Tractor
Used CV
CV
CE
Car
(%)
In acquired mortgage portfolio
(from GE), delinquencies are much
higher than industry standards –
Magma’s ability to manage it will be
critical
Magma Fincorp
7 Edelweiss Securities Limited
Chart 6: Higher credit cost estimated anticipating some stress and increase in provisioning coverage
Source: Company, Edelweiss research
Product diversification to augment growth potential
Magma is strategically moving away from CV/CE focus—down to <40% from as high as 70%
in FY06-10. Management’s intention over the past few years was to grow and establish its
brand in high yielding product segments viz., tractors, used CV and SME loans (proportion of
which has increased to ~23% from ~6% in FY09). Besides this, it has recently launched
collateralised products including home finance (by acquiring GE’s INR13.5bn home loan
portfolio) and introduced gold loans (offered from 44 branches). Currently, the company
offers a bouquet of nine products which augments its growth potential and cushions it from
single product concentration risks.
Table 2: Targets under-served primary customers, entry level vehicles, SRTO, first-time buyers
Source: Company
16.0
24.8
33.6
42.4
51.2
60.0
1.0
1.6
2.2
2.8
3.4
4.0
FY13 FY14E FY15E
(%)
(%)
Gross NPLs Net NPLs Prov cov
Products Key customer segments Focus areas to drive growthATS
(INR '000)
LTV
(%)
Tenure
(months)
Cars Entry level vehicles and UV/MUV Rural markets and UV/MUV segment 410 67 44
Small Road Transport Operator (SRTO) Tie up with car manufacturers
Commercial vehicles (CV) 1-5 vehicle owners (esp FTB segment) LCV & SCV 950 86 44
SRTO Tie up with CV manufacturers
Tractors Land owning farmers Alliances with OEMs 330 62 45
25-75 HP tractors New product introductions
Used CV FTB, small fleet drivers LCV 530 70 35
M&HCV, refinance High vintage vehicles (7-8 years)
Construction equipment Small scale enterprises (SSE), SME Increase collaboration with OEMS 2,100 79 39
Wider product range
SME loans SME segment MSME segment 2,440 N/A 31
Working capital, business expansion
Gold loans Primary borrowers Target underpenetrated urban 70 53 11
markets in North, West and East India
Home loans Affordable housing Tier 3 and 4 towns
General insurance Captive car and CV customers Penetrate motor insurance market
Rural agri based products Rural agri markets
Magma is strategically moving away
from CV/CE focus—proportion of
which is now down to less than 40%
from as high as 70% in FY06-10
0.0
0.4
0.8
1.2
1.6
2.0
FY10 FY11 FY12 FY13 FY14E FY15E
(%)
Credit cost as % of AUM
Banking and Financial Services
8 Edelweiss Securities Limited
• As the company utilises common infrastructure, branch network and customer
segment for all product verticals (except for gold loans) there is enough scope for
scaling up these newly launched/acquired businesses. Overall AUM growth of 21% over
FY13-15E will be primarily led by mortgage and gold loan business.
o Experience gained from inherent asset finance business will provide added value to
appraisal/credit process for mortgages (particularly evaluating surrogate income of
self employed category). Pan India presence with network of >200 branches will
give a quick head start to this business scale up– mortgages will be offered from
50% branches in initial year and gradually extended to 100% branches in five years.
o Gold loans currently stand at INR600mn, offered from 44 branches; we expect
them to grow to INR2.5bn by FY15E. The company will be targeting locations
outside of South which is highly competitive and shortlist few locations where lot
of business activities are conducted.
• Currently, used CVs and tractors are offered only from 50-60% of branches and growth
in these segments will be primarily led by increased product coverage from all eligible
branches (100% branches for used CVs and 75% branches for tractors). We expect both
the portfolios to double from the current level by FY15 (forming 26% of AUMs by FY15E
from ~19% in FY13).
• Considering industry-wide stress in CV and commercial equipment segment, we expect
Magma’s growth to be muted in this segment (to account for less than 30% of AUMs in
FY15E from 39% in FY13).
Chart 7: Strategic decision to diversify from CV/CE towards higher yielding products (proportion of consolidated AUMs)
Source: Company, Edelweiss research
Note: Higher yielding product includes used CV, tractor, SME loans
Newly launched products includes mortgages and gold loans
Regional diversification, balanced distribution mitigates event risk
Besides strategic product diversification, management also believes in regional
diversification. Magma has pan-India presence via its 275 branches across 21 states,
marking ~70% coverage. No single state contributes more than 11% to AUM. Well
diversified approach will help minimise regional, local and single event risks.
CV/CE
63%
Car
23%
High
yielding
14%
FY11
Used CVs and tractors are offered
only from 50-60% of branches and
growth in these segments will be
primarily led by increased product
coverage from all eligible branches
No single state contributes more
than 11% to AUM
CV/CE
39%
Car
30%
High
Yielding
23%
Newly
launched
8%
FY13
CV/CE
29%
Car
29%
High
Yielding
31%
Newly
launched
11%
FY15E
Magma Fincorp
9 Edelweiss Securities Limited
Chart 8: Balanced regional distribution minimises regional and local risks
Source: Company
Chart 9: Magma is rural/semi rural focused retail NBFC
Source: Company
Chattisgarh,
4%
Gujarat,
6%
MP,
7%
Maharashtra,
11%
AP,
10%
Karnataka,
5%Kerala,
5%
TN,
4%
Delhi/Uttarakha
nd
8%
Haryana,
6%
Punjab/HP
4%
Rajasthan
8%
UP
8%
Bihar
3%
Jharkhand
2%
Orissa
4%
WB
5%West -28%East-14%
North -34% South-24%
Rural
38%
Urban
19%
Semi-rural
43%
Banking and Financial Services
10 Edelweiss Securities Limited
Multiple levers to boost RoEs to >15% by FY15E Magma’s RoE profile was weak in FY12/13 (at <10%) due to regulatory changes pertaining to
off-balance transactions. The company, however, reduced reliance on off-balance sheet
transactions from as high as 70% (FY06-09) to ~30% in FY13, which led to dip in NIMs below
4%. The strategy to normalise RoEs to >15% will be led by NIM improvement (particularly
yield enhancement). This further supported by competitive funding cost (AA+ rating for long
term debt) will help improve NIMs (of standalone entity) to 5.8% by FY15E.
Chart 10: RoA (standalone entity) to surge led by NIM expansion (yield enhancement)
Source: Company, Edelweiss research
Focus on higher yielding products
Rising share of high yielding products (tractors, used CVs, LAP, gold loans) from 29% in FY13
to 38% in FY15E is likely to benefit blended lending yields.
Chart 11: Rising contribution of higher yielding products to drive yield improvement
Source: Company, Edelweiss research
* Note : Higher yielding segments include Used CV, tractor, SME, LAP and Gold loans
Lower yielding segments include Car, CV/CE
3.2 4.7
0.7
1.1 1.2
0.7 3.3
3.5 0.5
1.2
0.4
0.6
0.0
3.0
6.0
9.0
12.0
15.0
FY13 FY15E
(%)
NII/assets Sec. Inc./assets Fees/assets
Opex/assets Prov/assets Taxes/assets
RoA=0.9
RoA=1.3
High
yielding
14%
Low
Yielding
86%
FY11
The strategy to normalize RoEs to
>15% would be led by NIM
improvement, particularly yield
enhancement. This further
supported by competitive funding
cost (AA+ rating for long term debt)
will help improve NIMs to 5.8% by
FY15
High
yielding
38%
Low
Yielding
62%
FY15E
High
yielding
29%
Low
Yielding
71%
FY13
Magma Fincorp
11 Edelweiss Securities Limited
Higher contribution from securitised income
Magma’s reliance on off-balance sheet transactions has been high—more than 70% of AUM
were securitised in FY04-09. However, RBI’s stringent norms for assignment/securitisation
led to this proportion gradually falling to ~50%, 40% and 30% in FY11, FY12 and FY13,
respectively. Particularly in FY12, margins were hit by change in accounting policies on
recognition of securitisation income—to be amortised rather than booked upfront. Owing
to this, contribution from securitisation income (to net revenue) dropped sharply to 5% in
FY12 from ~35-45% over FY06-11. As the situation stabilises and considering unamortised
securitisation income of ~INR2.5bn in FY13 (to be accrued over next two-three years), we
expect contribution from securitisation income to overall revenue to increase from 5% in
FY12 to 16% in FY15E.
Chart 12: Contribution of securitisation income to stabilise
Source: Company, Edelweiss research
Fixed rate nature of lending: Run down of low yield products contracted in FY11
Interestingly, historical trend of contracted yields suggests that yields for core product
portfolio (cars, CV, CEs) originated in FY13 was higher (by 30-100bps) than yields contracted
in FY12 and loans originated in FY12 carried yields which were higher by 100-150bps than
FY11. Even if we assume 70-75bps compression in yields from the current level, run down of
portfolio with relatively lower yields originated in FY11 and FY12 will itself support yields
enhancement (expect 20-30bps yield improvement due to this).
48% 58%
28% 30%
28% 52%
24%
67%
70%
72%
0
61
121
182
242
303
FY11 FY12 FY13 FY14E FY15E
(IN
R b
n)
AUM
On book Off book (inc. amortized)
Off book (inc. upfronted)
3.0
11.0
19.0
27.0
35.0
43.0
FY11 FY12 FY13 FY14E FY15E
(%)
Securitisation income/ Net revenue
Due to change in
accounting policies
Owing to RBI’s stringent norms for
securitisation contribution from
securitisation income (to net
revenue) dropped sharply to 5% in
FY12 from ~35%-45% over FY06-11
Even if we assume, 70-75bps
compression in yields from the
current level, run down of portfolio
with relatively lower yields
originated in FY11 and FY12 will
itself support rising yields
Banking and Financial Services
12 Edelweiss Securities Limited
Chart 13: Run down of lower yield portfolio, contracted in FY11, to aid blended yields
Source: Company
Borrowing profile: Predominantly relied on bank; rating upgrade to aid diversification
While on the asset side, lending rate is largely fixed over the tenor, on the borrowing side,
Magma predominantly relies on bank borrowings (35% of overall) wherein it is likely to
benefit immediately from any cut in base rate of banks. Asset liability profile is also
favorably matched for falling interest rate scenario. Additionally, rating upgrades during
FY12 has opened up funding avenues, in turn limiting the concentration risk and allows
source for stable flow of funds.
Table 3: Recent rating upgrades to open funding avenues (debt market)
Chart 14: Well matched asset liability profile with floating nature of liabilities to aid margin in falling interest rate scenario
Source: Company
9.0
11.2
13.4
15.6
17.8
20.0
Car CV CE Used CV Tractor SME
(%)
FY11 FY13
220bps240bps150bps
Core portfolio
Instrument 31-Mar-10 31-Mar-11 31-Dec-12
Short term PR1+ A1+ A1+
Long term AA AA AA+
Preference capital AA- AA- AA
Sub debt AA- AA- AA
Perpetual debt A+ A+ AA-
0.0
12.0
24.0
36.0
48.0
60.0
Upto 6
months
6 mths - 1
yr
1-3 years 3-5 years > 5 years
(%)
Assets Liabilities
Rating upgrades in FY12 has opened
up avenues of funding, limiting
concentration risks
Banks
35%
Capital
market
21%
Others
11%
Securitisation
33%
Magma Fincorp
13 Edelweiss Securities Limited
Productivity ratios to improve
As common branch network is used for all product verticals, employees per branch for
Magma are much on a higher side (due to diversified bouquet of nine products). Of the
7,300 employees, ~75% are field officers and staff cost accounts for bulk of operating cost.
Chart 15: Common branches for all products lead to higher employees/branch; staff costs account for bulk of opex
Source: Company, Edelweiss research
Businesses that Magma has been relying on off late for growth (used CVs, tractors, SME
loans) or newly launched businesses (home loan, gold loans etc) have different operating
dynamics, leading to higher cost structure. However, it has been able to manage opex/AUM
at ~3.5%, almost at par with peers. Employee productivity (AUM/employee at INR20mn) is
still 20-30% lower than peers as 20% of existing employees are recruited in last one year.
There is scope for productivity improvement as branch utilisation increases with reasonable
scale up and increased coverage of newly launched/acquired businesses.
Chart 16: Opex/AUM in line with peers but employee productivity (AUM/employee) 20-30% lower than peers
Source: Company, Edelweiss research
Cost-to-income ratio for Magma appears high at 65% vis-à-vis peers due to weak income
profile, but NIM improvement to 5.8% will itself bring down it down to ~53%.
12
17
22
27
32
37
Magma MMFS SHTF
(No
s.)
Employee/branch
FY12 FY13
2.0
2.6
3.2
3.8
4.4
5.0
Magma MMFS SHTF
(%)
Opex/AUM
FY12 FY13
33.0
38.4
43.8
49.2
54.6
60.0
FY10 FY11 FY12 FY13 FY14E FY15E
(%)
Employee cost / total operating expenses
15
19
24
28
33
37
Magma MMFS SHTF
(IN
R m
n)
AUM/Employee
FY12 FY13
Employee productivity,
AUM/employee at INR20mn, is still
20-30% lower than peers and there
is scope for productivity
improvement
Banking and Financial Services
14 Edelweiss Securities Limited
Chart 17: C/I appears elevated due to weak revenue profile Charts 18: Cost-to-income ratio to improve going forward….
Source: Company, Edelweiss research
Experienced management
Management under the able leadership of Mr. Mayank Poddar, Chairman, and Mr. Sanjay
Chamria, Vice Chairman & MD, has been instrumental in successfully piloting Magma
through rough waters in FY12 and focused efforts are still underway to set up a scalable and
resilient business model to achieve next level of growth.
Table 4: Experienced management to guide the way forward
Source: Company
26.0
38.2
50.4
62.6
74.8
87.0
Magma MMFS SHTF
(%)
Cost/Income
FY12 FY13
Mayank Poddar Chairman Supports policy formulation and guidance to the Management/Board
Over 30 years of experience in the financial sector
Sanjay Chamaria Vice Chairman & MD Anchors strategic policy formulation and execution
Drives new business initiatives and leads management team
Ashutosh Shukla COO,
Asset Financing Business
Experience of over 25 years in Magma and Consortium Finance. Setup North and West
Zone business and headed collections vertical in Magma earl ier
Sachin Khandelwal MD & CEO,
Magma HFC
Experience of over 20 years in sales and marketing. Ex-MD of ICICI Home Finance.
Joined Magma in Aug 2012
Vikas Mittal Business Head,
Gold Loans
Experience of over 20 years in brokerage and wealth management industry.
Ex- MD & CEO of Enam Direct & Ex-MD of Citi Wealth Advisors
Swaraj Krishnan CEO, Magma HDI
General Insurance
Veteran in the general insurance industry. Ex-CEO of Bajaj Al l ianz General Insurance
V Lakshmi
Narasimhan
Chief Financial Officer Experience of over 23 years in Magma and Consortium Finance. Incubated
SME Loans & Tractors business in Magma. Served as National Credit and Risk Head.
Kailash Baheti Chief Strategy Officer Ex-CEO of Century Extrusions. Extensive experience in finance, accounts,
compliance and legal functions
Sandeep Walunj Chief Marketing Officer Experience of over 20 years in consumer marketing in FMCG & Retail businesses.
Ex-CMO - Big Bazaar & Value Formats in Future Group; Joined Magma in Aug 2012
Mahendar Bagrodia Chief of Recievables
Management
Served as National Risk and Credit Head prior to current role. Experience of over 18
years of which 12 years with Magma Fincorp
Sumit Mukherjee Chief Sales Officer Served as National Sales Head and Credit and Risk Head of Magma prior to current
role. Worked with Citi corp. as VP, over 18 years of experience in sales
Bu
sin
ess
He
ad
Pro
mo
ter
dir
ec
tors
Fu
nc
tio
n H
ea
ds
41.0
50.2
59.4
68.6
77.8
87.0
FY11 FY12 FY13 FY14E FY15E
(%)
Cost-income
Magma Fincorp
15 Edelweiss Securities Limited
Valuation
Magma, over the years, has built a diversified (both product-wise and geography-wise),
scalable (people-centric with decentralised, but standardised processes) and profitable
business model. We are building in AUM CAGR of 20% over FY13-15E primarily led by newly
launched/acquired gold and home loan business and increased coverage of used CV and
tractors from all eligible branches (currently being offered from 50-60% branches). This,
coupled with margin improvement, will push RoA (for standalone entity on earnings assets
including assignment) towards the 1.3% trajectory over the next couple of years.
The market seems to have played down the company’s inherent scalable business model
and the stock trades at <1x FY15E consolidated book, a steep discount to peers owing to
weak RoE profile in wake of change in accounting policies in FY12. We expect the stock to
re-rate to 1.4x FY15E book, implying a target price of INR133 (upside of 45% plus),
considering RoA of 1.3% and RoE of >15% by FY15E. Also, the regulatory overhang has
eased to an extent with clarity on treatment of off-book assets, loan loss provisioning
requirement and capital adequacy.
We initiate coverage with ‘BUY/Sector Outperformer’ recommendation/rating on the stock.
Chart 19: Historical price-to-book value band (on standalone entity’s networth)
Source: Bloomberg, Edelweiss research
Table 5: Relative valuation metrics – Magma trades at a steep discount to its peers
Source: Bloomberg, Edelweiss research
0.0
0.4
0.8
1.2
1.6
2.0
Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13
(x)
MGMA IN Equity
CMP MCap AUM (FY13) EPS CAGR (%)
(INR) (INR bn) (INR bn) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY13-15E FY14E FY15E
Magma Fina nce 90 17 162 83 95 1.1 0.9 11 15 8.1 5.9 44.1 13.0 16.0
Mahindra & Mahindra Finance 277 158 279 92 109 3.0 2.5 18.1 22.8 15.3 12.2 24.8 21.2 22.7
Shri ram Tra ns port 679 154 497 369 435 1.8 1.6 69 81 9.8 8.4 16.3 20.3 20.2
Baja j Fins erv 1,387 69 175 821 935 1.7 1.5 135 162 10.3 8.6 18.5 17.9 18.0
Sunda ram Finance 549 61 176 216 252 2.5 2.2 42 49 13.0 11.3 14.8 20.9 20.7
Shri ram City Union Finance 989 55 158 497 602 2.0 1.6 95.7 117.7 10.3 8.4 20.5 21.6 21.4
BV (INR) P/BV (x) EPS (INR) P/E (x) ROE (%)
The market seems to have played
down the company’s inherent
scalable business model. The stock
trades at <1x FY15E consolidated
book, a steep discount to peers
Banking and Financial Services
16 Edelweiss Securities Limited
Key Risks
Cyclicality of auto segment
Despite diversifying in nine segments, auto financing (cars, CV, CE) still contributes ~70% to
AUM. The growth and asset quality performance in these businesses would be correlated to
underlying industry dynamics. Hence, Magma’s earnings as well will be subject to
seasonality and cyclicality of the same.
Execution risk for newly launched/acquired businesses
Magma has recently acquired GE’s mortgage portfolio and has launched gold loan business.
The operating dynamics of this product segment are distinct from the company’s existing
product bouquet. While management has set an aggressive target for itself by planning to
utilise its current network, making a significant dent and gaining market share in these
highly competitive product segments will be a key challenge.
Moreover, sub-standard proportion (at 8% of AUMs) in acquired GE mortgage portfolio is
much higher than industry average. Magma’s ability to manage and bring it under control
will be critical. SME lending—while it has been the best performing segment till date (having
gone through three cycles), entirely unsecured nature poses risk to delinquency.
Lower Tier 1 ratio at 10.6%
In FY13, Magma’s Tier 1 ratio came off to 10.6% from 14.1% primarily due to acquisition of
home loan portfolio and 20% AUM growth in existing businesses, while RoE were in low
double digit. Estimating scale in new businesses, we expect AUM growth of >20%, while
RoEs will be in 15-18% range making it necessary for the company to go in for equity dilution.
We have not factored in any capital raising and consequently RoE dilution in our estimates.
Banking license can pose risk to near-term RoEs
Magma is one of the 26 applicants who have thrown in their hat in the ring for new bank
license. Availing banking licence can be structurally positive in the long run as it provides: (1)
access to huge savings pool of India; and (2) lends scalability/diversity on asset as well
liability fronts.
However, in the short to medium term there will be pain due to costs attached: (1)
regulatory cost: To be drag on CRR, SLR, PSL; (2) operational cost: Financial inclusion
(branches in tier-5/6 cities) will be a costly affair due to high gestation period; and (3)
execution risk: Competition, talent acquisition/retention and training of existing staff.
While challenges will be relatively limited for Magma given its lower asset base, existing
presence in rural locations and established brand name in areas of its operation, RoEs will
still be under pressure in the near to medium term.
Magma Fincorp
17 Edelweiss Securities Limited
Company Description
Magma is one of the leading NBFCs offering a range of financial products with pan-India
presence. The company finances purchase of a gamut of products such as CVs, tractors, cars,
used vehicles, gold as well as construction equipment with mortgages added recently to its
portfolio. It has a strong network of 275 branches spread across 21 states/ Union Territories
in India, covering ~3,000 business clusters with INR162bn assets under management.
Fig. 4: Magma’s history of business scale up
Source: Company
1989 Started financing business
1996 Started retail financing
2001 Acquisition of consortium finance
2006 Used CV business launched
2008�
�
Started implementation of vertical business structure
Merger with Shrachi
2009 SME business launched
2010 JV with HDI Gerling for general insurance business
2012
�
�
�
�
�
Appointed KPMG as statutory auditors
KKR and IFC invest INR4.39bn for 27.8% stake
CARE upgrades ratings
Securitisation and related accounting policy streamlined
Management bandwidth expanded
2013
�
�
�
�
�
Acquisition of GE’s mortgage business
Gold loans business launched
General insurance business starts operations
Oracle appointed for implementation of digital express highway
Genpact appointed for process re-engineering initiatives
Banking and Financial Services
18 Edelweiss Securities Limited
Financial Outlook
Volatile earnings due to regulatory changes in FY12
Magma’s earnings have been highly volatile since the past two-three years, particularly in
FY12 when RoA dipped below 60bps (from 125bps in FY11) on back of significant dent in
margin, largely attributed to change in accounting policies.
Reliance on off-balance sheet transactions took a toll on earnings
Magma used to securitise more than 50% of loans originated in a year and would accrue
securitisation spreads of ~6% upfront. This led to 35-45% of net revenues being driven by
securitisation income. However, regulatory changes with respect to minimum retention
period and amortisation of income took a toll on earnings in FY12. The change in accounting
policy led to significantly lower contribution of this income stream to net revenue (from
35% in FY11 to 4.5% in FY12) leading to huge volatility in NIMs. Margin declined 170bps in
FY12 (from 4.6% in FY11). This income stream has stabilised to a great extent in FY13 and
will further improve as we move into FY14 and FY15.
Chart 20: Increased contribution from securitisation income.. Chart 21: .. also to aid margin expansion
Source: Company, Edelweiss research
Securitisation income: Regulatory change requiring amortisation of
securitisation/assignment income rather than being upfronted affected the contribution
from securitised income. Securitised income is now amortised over three-four years. With
changes implemented with effect from FY12, the first year was most adversely affected and
in FY13 it has stabilised to some extent. Full benefit will flow from FY15 as it will include
income from past four years’ pool. Unamortised securitization income stands at INR2.5bn as
of FY13.
Collection/support services (included in other income): Collection/support services are
now being classified under other income vis-à-vis earlier classification under revenue from
operations, rendering lumpiness to other income on a small base. The income booked is
equivalent to 0.2-0.4% of AUMs. However, this pool is likely to run down by FY15, after
which we expect other income to stabilise.
0.0
1.6
3.2
4.8
6.4
8.0
FY11 FY12 FY13 FY14E FY15E
(x)
NII (excl. securitisation)/Assets Securitised Income/Assets
0.0
1.4
2.8
4.2
5.6
7.0
FY11 FY12 FY13 FY14E FY15E
(x)
NII / Assets (incl. securitisation …
The change in accounting policy for
amortisation of securitisation
income led to significantly lower
contribution of this income stream
to net revenue, from 35% in FY11 to
4.5% in FY12, leading to huge
volatility in NIMs
Magma Fincorp
19 Edelweiss Securities Limited
Brokerage and commission (included in other operating expenses): Magma now amortises
brokerage and commission expenses (equivalent to 1.2-1.3% of incremental disbursements)
over the tenor of the loan rather than upfronting them. Having adopted this since FY12,
reported operating expenses were almost flat in FY12 (over FY11) despite 25% plus AUM
growth. This expense line item saw an uptick in FY13 and will further move till FY15 as
amortisation of past three-four years will come into play.
Inherent business model continues to be resilient
Despite tough macro and regulatory changes, Magma’s underlying core business model was
resilient enough to weather the challenges, rendering comfort that conditions would
stabilise sooner than later. While it significantly lowered reliance on off balance sheet, AUM
growth remained robust at 25% over FY11-13 (excluding acquired home loan portfolio).
Additionally, management further strengthened its business model by diversifying its
product suite (bought GE mortgage portfolio, launched gold loans and gained traction on
SME business) which will sustain AUM growth at 20% plus CAGR over FY13-15E.
Chart 22: Disbursement/AUM growth continued to be robust despite trying times owing to inherent resilient business model
Source: Company, Edelweiss research
Yield enhancement key to RoE improvement
With opex/AUMs at 3.5% being almost at par with peers (though there is a scope of further
productivity improvement) and credit cost at <50bps being amongst the best-in-class,
management’s strategy to scale up RoAs to 1.3% will be led by margin improvement
(particularly yield enhancement). We believe NIMs will undergo structural improvement to
5.8% by FY15E due to:
1) Rising share of higher yielding products in asset mix (tractors, used CVs, LAP, gold loans)
from 29% in FY13 to 39% in FY15E.
2) Boost to securitisation income, considering unamortised securitisation income of
INR2.5bn in FY13 to be accrued over next two-three years; contribution from
securitisation income to overall revenue to increase from 5% in FY12 to 16% in FY15E.
3) Run down of portfolio originated in FY11 and FY12 at relatively lower yields will itself
support yield improvement to the extent of 20-30bps (despite assuming 70-75bps
compression in card rates from the current level).
13.0
19.4
25.8
32.2
38.6
45.0
36
61
86
111
136
161
FY10 FY11 FY12 FY13 FY14E FY15E
(%)
(IN
R b
n)
Disbursement Disbursement growth (RHS)
12.0
18.0
24.0
30.0
36.0
42.0
65
111
157
202
248
294
FY10 FY11 FY12 FY13 FY14E FY15E
(%)
(IN
R b
n)
AUM AUM growth (RHS)
While it significantly lowered
reliance on off balance sheet, AUM
growth remained robust at 25%
over FY11-13, excluding acquired
home loan portfolio
Banking and Financial Services
20 Edelweiss Securities Limited
We expect Magma’s RoA to improve to 1.3% in FY15E (from 0.9% in FY13), translating into
RoE of >15% on back of NIM expansion; however, pushed down by modest rise in credit
costs.
Chart 23: Margin expansion and controlled opex. to drive RoA re-rating
Source: Company, Edelweiss research
Consolidated RoE to retrace to 16% with earnings CAGR of 45%
We have reported financials on standalone basis; however, on consolidated basis, there
would be following additions: (1) 74% of MITL (tractor finance business); (2) 37% of Magma
HDI (General Insurance Company); (3) 100% of Magma Housing Finance (MHFL).
Fig. 5: Financial structure
Source: Company
Magma ITL (MITL): MITL is a joint venture of Magma Shrachi Finance (MSFL) with
International Tractor (ITL). MSFL holds 74% in JV while ITL holding 26%.
Magma HDI: It is a JV between Magma and HDI Gerling (German insurer) with Magma
holding 37% stake in JV.
2.7 3.2 4.7
0.2 0.7
1.1
0.0
2.5
5.0
7.5
10.0
12.5
FY12 FY13 FY15E
(%)
NII/assets Sec. Inc./assets Fees/assets
Opex/assets Prov/assets Taxes/assets
RoA=0.6
RoA=0.9
RoA=1.3
Magma standalone
(100%)
MHF (100%)
Magma FincorpConsolidated
MHDI
(37%)
MITL
(74%)
On consolidated basis there would
be following additions: 1) 76% of
MITL (tractor finance business); 2)
37% of Magma HDI (General
Insurance Company); 3) 100% of
Magma Housing Finance Limited
Magma Fincorp
21 Edelweiss Securities Limited
Magma Housing Finance (MHFL): Magma acquired 100% equity share capital of GE Money
Housing Finance (GEMHF), a housing finance company. GEMHF is now renamed Magma
Housing Finance (MHFL), which will be a vehicle for future housing loan originations.
Additionally, Magma acquired entire home equity loan portfolio of GE Money Financial
Services (GEMFSPL). While INR3bn of home equity portfolio is retained in standalone entity,
balance is shifted to housing finance company.
Table 6: Acquired mortgage portfolio profile
Source: Company
*Note: Includes Future Principal + outstanding EMI
On consolidated basis, we expect earnings CAGR of ~45% over FY13-15E, higher than 40%
growth on standalone basis driven by scale up of MHFL and MITL. We expect MHDI to
continue to incur losses even in FY14. We expect consolidated RoEs (after payment of
preference share dividend) to inch up to 16% by FY15 from current 10%.
Table 7: Consolidated earnings CAGR of 44% over FY13-15E and RoEs of 16%
Source: Company, Edelweiss research
*Note: RoE is calculated after providing for preference share dividend
Key parameters Housing finance Home equity
Portfolio size (INR bn) * 6.6 9.4
Average ticket size (INR mn) 1.5 1.8
Average seasoning (months) 56 48
Weighted average LTV at origination (%) 54 42
Total portfolio locations 37 55
FY12 FY13 FY14E FY15E
Consolidated PAT (INR mn) 740 1,391 2,118 2,889
Consoliated NW (INR mn) 11,015 13,974 15,695 18,117
Consolidated BV (INR) 58.1 73.6 82.6 95.4
Consolidated RoE (%) 6.9 9.7 13.0 16.0
We expect consolidated ROEs to
inch up to 16% by FY15 from
current 10%
22 Edelweiss Securities Limited
Banking and Financial Services
Financial Statements (Standalone entity)
Assumptions
FY12 FY13 FY14E FY15E
GDP(Y-o-Y %) 6.2 5.0 6.0 7.0
Inflation (Avg) 8.9 7.4 5.2 6.0
Repo rate (exit rate) 8.5 7.5 6.8 6.0
USD/INR (Avg) 48.0 54.5 58.0 56.0
Credit growth (%) 17.1 14.7 15.0 16.0
Bank's base rate (%) 10.5 9.7 9.5 9.3
Wholesale borrowing cost (%) 10.5 8.9 8.7 8.5
G-sec yield (%) 8.5 7.8 7.6 7.5
Operating metric assumptions (%)
Yield on advances 8.7 10.9 12.3 12.6
Cost of funds 11.5 11.5 11.2 11.1
NIMs 2.9 4.0 5.2 5.8
Employee cost growth 10.7 36.1 26.0 19.3
Other opex growth -9.2 63.9 23.3 14.3
Tax rate 22.9 31.5 33.0 33.0
Dividend payout 23.2 12.4 10.0 10.0
Secutisation Income 189 1,013 1,797 1,993
Balance sheet assumption (%) 0.1 0.1 0.1 0.1
Disbursement growth 36.7 17.2 25.3 18.9
Repayment/prepayment rate 39.5 35.5 35.5 34.6
Securitised Asset 42.4 32.4 26.2 25.0
Gross NPLs 0.0 1.8 2.4 2.7
Provisioning coverage 100.0 20.8 35.0 50.0
Number of employees 5,900 7,100 7,963 8,766
Number of branches 200 275 330 375
Income statement (INR mn)
Year to March FY12 FY13 FY14E FY15E
Interest income 8,925 13,339 18,181 22,443
Interest charges 5,985 8,874 11,380 13,460
Net interest income 2,939 4,465 6,801 8,983
Securitization income 189 1,013 1,797 1,993
Fee & other income 1,047 1,603 1,369 1,411
Net revenues 4,175 7,081 9,967 12,388
Operating expense 3,020 4,535 5,646 6,582
- Employee exp 1,490 2,028 2,556 3,048
- Depreciation /amortisation 296 367 425 484
-commission expense on sale 378 915 1,257 1,429
- Other opex 856 1,225 1,408 1,620
Preprovision profit 1,155 2,546 4,321 5,806
Provisions 334 754 1,609 2,227
PBT 821 1,792 2,712 3,579
Taxes 188 564 895 1,181
PAT 632 1,228 1,817 2,398
Reported PAT 632 1,228 1,817 2,398
Basic number of shares (mn) 190 190 190 190
Basic EPS (INR) 2.6 6.5 9.6 12.6
DPS (INR) 0.6 0.8 1.0 1.3
Payout ratio (%) 23.2 12.4 10.0 10.0
Growth ratios (%)
Year to March FY12 FY13 FY14E FY15E
NII growth 23.2 51.9 52.3 32.1
Net revenues growth (18.0) 69.6 40.8 24.3
Opex growth (0.4) 50.2 24.5 16.6
PPP growth (44.0) 120.5 69.7 34.4
Provisions growth (6.0) 125.8 113.2 38.4
PAT growth (44.7) 94.2 48.0 32.0
Operating ratios (%)
Year to March FY12 FY13 FY14E FY15E
Yield on advances (on-book) 15.1 15.2 15.8 15.8
Yield on advances (off-book) 0.4 2.0 3.4 3.6
Yield on advances (total AUM) 8.7 10.9 12.3 12.6
Cost of funds 11.5 11.5 11.2 11.1
Spread 3.5 3.7 4.6 4.7
Net interest margins 2.9 4.0 5.2 5.8
Cost-income 72.3 64.0 56.6 53.1
Tax rate 22.9 31.5 33.0 33.0
23 Edelweiss Securities Limited
Magma Fincorp
Balance sheet (INR mn)
As on 31st March FY12 FY13 FY14E FY15E
Equity capital 380 380 380 380
Reserves 10,434 11,356 12,776 14,708
Net worth 10,813 11,736 13,156 15,088
Preference capital 1,427 1,614 1,614 1,614
Secured loans 51,713 75,220 86,835 106,674
Unsecured loans 8,089 19,096 22,045 27,081
Total borrowings 59,801 94,316 108,880 133,755
Assignment 51,050 52,640 51,824 59,859
Total liabilities 123,091 160,307 175,474 210,317
Loans 66,520 96,905 115,263 141,825
Investments 333 2,205 2,205 2,205
Current assets 10,873 16,565 13,908 15,413
Current liabilities 7,238 9,191 9,272 10,275
Net current assets 3,635 7,374 4,636 5,138
Fixed assets (net block) 1,788 1,744 1,769 1,585
Deferred tax asset (236) (561) (224) (295)
Assignment 51,050 52,640 51,824 59,859
Total assets 123,091 160,307 175,474 210,317
Earning assets (EA) 68,701 104,740 120,335 147,582
EA (incl. assignment) 119,751 157,380 172,159 207,442
Disbursements 71,340 82,617 103,481 123,004
Assets under management 116,237 147,557 177,087 211,684
On-book assets 65,187 94,917 125,263 151,825
Assigned/Securitised 51,050 52,640 51,824 59,859
On-book assets (%) 56 64 71 72
Assigned/Securitised (%) 44 36 29 28
Securitisation income 185 1,020 1,797 1,993
Peer comparison valuation
Market cap Diluted PE (X) Price/BV (X) ROAE (%)
Name (USD mn) FY14E FY15E FY14E FY15E FY14E FY15E
Magma Fincorp 282 8.1 5.9 1.1 0.9 13.0 16.0
Rural Electrification Corporation 3,220 4.4 4.0 0.9 0.8 23.0 21.4
HDFC 21,760 22.3 19.1 4.6 4.1 21.7 22.8
Infrastructure Development Finance Co 3,239 9.1 7.7 1.2 1.1 14.6 15.3
LIC Housing Finance 1,937 9.0 7.4 1.4 1.2 18.1 17.6
Mahindra & Mahindra Financial Services 2,580 15.3 12.2 3.0 2.5 21.2 22.7
Manappuram General Finance 148 3.3 2.8 0.3 0.3 10.7 12.0
Multi Commodity Exchange of India 621 15.1 12.9 2.9 2.7 20.0 20.9
Muthoot Finance 588 4.0 3.5 0.8 0.7 21.4 20.4
Power Finance Corp 2,999 3.5 3.0 0.7 0.6 20.1 19.9
Reliance Capital 1,461 10.6 9.3 0.7 0.7 6.7 7.3
Shriram City Union Finance 912 10.3 8.4 2.0 1.6 21.6 21.4
Median - 9.1 7.7 0.8 0.7 20.1 19.9
AVERAGE - 9.7 8.2 1.3 1.2 15.7 15.8
Source: Edelweiss research
RoE decomposition (%)
Year to March FY12 FY13 FY14E FY15E
Net interest income/Assets 2.7 3.2 4.1 4.7
Securitised Income/Assets 0.2 0.7 1.1 1.1
Other Income/Assets 1.0 1.2 0.8 0.7
Net revenues/Assets 3.8 5.1 6.0 6.5
Operating expense/Assets 2.8 3.3 3.4 3.5
Provisions/Assets 0.3 0.5 1.0 1.2
Taxes/Assets 0.2 0.4 0.5 0.6
Total costs/Assets 3.3 4.2 4.9 5.3
ROA 0.6 0.9 1.1 1.3
Equity/Assets 7.4 8.0 7.4 7.3
ROAE 7.6 10.9 14.6 17.0
Valuation metrics
Year to March FY12 FY13 FY14E FY15E
Diluted EPS (INR) 2.6 6.5 9.6 12.6
EPS growth (%) (67.0) 149.6 48.0 32.0
Book value per share (INR) 57.0 61.8 69.3 79.4
Diluted P/E (x) 34.8 13.9 9.4 7.1
Price/ BV (x) 1.6 1.5 1.3 1.1
Consolidated financials
Year to March FY12 FY13 FY14E FY15E
PAT (INR mn) 740 1,391 2,118 2,889
Networth (INR mn) 11,015 13,974 15,695 18,117
Diluted EPS (INR) 3.9 7.3 11.2 15.2
Book value per share (INR) 58.1 73.6 82.6 95.4
Consol ROE (%) 6.9 9.7 13.0 16.0
P/E (Cons) (x) 23.1 12.3 8.1 5.9
Price/ BV (Cons) (x) 1.6 1.2 1.1 0.9
24 Edelweiss Securities Limited
Banking and Financial Services
*in last one year
*in last one year
Insider Trades
Reporting Date Acquirer / Seller B/S Quantity Traded
10-Apr-13 India Capital Fund Limited Sell 3,190,000
14-Nov-11 Microfirm Softwares Pvt Ltd Buy 10,000,000
5-Sep-11 Citigroup Global Mkts. (Mauritius) Pvt. Ltd. Sell 4,147,940
16-Aug-11 Microfirm Softwares Pvt Ltd Buy 1,244,685
7-Jul-11 Zend Mauritius VC Investments Buy 26,854,375
Bulk Deals
Date Acquirer / Seller B/S Qty Traded Price
10-Jun-13 Clsa (Mauritius) Ltd Sell 4,916,706 92.8
10-Jun-13 Goldman Sachs Singapore Pte Buy 5,162,246 92.8
25-Mar-13 Sundaram Select Midcap Sell 2,160,269 85.0
25-Mar-13 Lavender Investments Ltd Buy 2,265,885 85.0
20-Mar-13 Lavender Investments Ltd Buy 4,967,121 85.0
Holding – Top10 Perc. Holding Perc. Holding
Zend Mauritius VC Investments 14.14 International Finance Corporation 12.11
Lavender Investments 7.33 Wellington Management Company LLP 6.45
India Capital Fund 5.13 Macquarie Bank 2.65
CLSA Mauritius 2.59 KKR Mauritius Direct Investments 1.93
Deutche Securities Mauritius 1.23 Dimensional Fund Advisors 0.01
*as per last available data
* Source: Bloomberg
Additional Data
Directors Data
Mayank Poddar Chairman Sanjay Chamaria Vice-Chairman & Managing Director
Nabankur Gupta Director Neil Graeme Brown Director
Narayan K Sheshadri Director Satya Brata Ganguly Director
Kailash Nath Bhandari Director Sanjay Nayar Director
Auditors - B S R & Co
*as per last annual report
25 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Allahabad Bank BUY SP M Axis Bank BUY SO M
Bank of Baroda BUY SP M Federal Bank BUY SO L
HDFC HOLD SP L HDFC Bank HOLD SP L
ICICI Bank BUY SO L Indian Overseas Bank HOLD SU M
IndusInd Bank BUY SP L IDFC BUY SO L
ING Vysya BUY SO L Karnataka Bank BUY SO M
Kotak Mahindra Bank REDUCE SU M LIC Housing Finance BUY SO M
Mahindra & Mahindra Financial Services BUY SO M Manappuram General Finance BUY SP H
Multi Commodity Exchange of India BUY SO M Muthoot Finance BUY SO M
Oriental Bank Of Commerce BUY SO L Power Finance Corp BUY SO M
Punjab National Bank HOLD SU M Reliance Capital BUY SO M
Rural Electrification Corporation BUY SO M Shriram City Union Finance BUY SO M
South Indian Bank HOLD SP M State Bank of India BUY SO L
Union Bank Of India BUY SO M Yes Bank BUY SO M
Development Credit Bank BUY SO M
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
26 Edelweiss Securities Limited
Banking and Financial Services
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: [email protected]
Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206
Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476
Nirav Sheth Head Sales [email protected] +91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services
Allahabad Bank, Axis Bank, Bank of Baroda, Federal Bank, HDFC, HDFC Bank, ICICI Bank, Infrastructure Development Finance Co Ltd, IndusInd Bank, Indian
Overseas Bank, Karnataka Bank, Kotak Mahindra Bank, LIC Housing Finance, Multi Commodity Exchange of India, Manappuram General Finance,
Mahindra & Mahindra Financial Services, Muthoot Finance, Oriental Bank Of Commerce, Punjab National Bank, Power Finance Corp, Reliance Capital,
Rural Electrification Corporation, State Bank of India, Shriram City Union Finance, South Indian Bank, Union Bank Of India, ING Vysya, Yes Bank
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 120 49 17 186
* - stocks under review
Market Cap (INR) 118 56 12
Date Company Title Price (INR) Recos
Recent Research
02-Jul-13 Development
Credit Bank
Sailing smooth post
weathering the storm;
Initiating Coverage
47 Buy
25-Jun-13 Union Bank
of India
Asset quality stable despite
testing times;
Visit Note
177 Buy
17-Jun-13 Oriental Bank
of Commerce
Asset quality risks to stabilise;
NPLs below 3% by FY14;
Visit Note
237 Buy
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation
Buy appreciate more than 15% over a 12-month period
Hold appreciate up to 15% over a 12-month period
Reduce depreciate more than 5% over a 12-month period
Rating Expected to
27 Edelweiss Securities Limited
Magma Fincorp
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28 Edelweiss Securities Limited
Banking and Financial Services
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