May 17, 2018
I
Direct
nstinct
I-direct Instinct
Key risks to investing in I-direct Instinct
• It is a quick pitch note, which captures the essence of an idea in brief
• Instinct idea may be based on management interaction or some immediate triggers that may have
a positive impact on the future of the company
• Target price is based on forward estimates, which will be published along with Detailed Coverage
Report or Nano Nivesh report as the case may be
• The intent is to capture price action by coming out with a gist, which may or may not be an interim
report between management interaction and publication of the final report
• The fair value of I-direct Instinct stocks is subject to expected growth potential in the future. Though
due diligence has been done to a fair extent, the actualisation of growth still has a degree of
uncertainty attached to it. Customers are advised to allocate a small proportion of their investible
income to these stocks and diversify well
ICICI Securities Ltd | Retail Equity Research
I-direct Instinct
May 17, 2018
Rating Matrix
Rating : Buy
Magma Fincorp (MAGFI) | 183
Target : |230
Target Period : 12 -15 months Magma Fincorp was incorporated in 1988 and began by offering vehicle
Potential Upside : 26%
and equipment financing solutions to individuals and small businesses in
Stock Data
India. It later included CV, tractor finance, SME loans as well as insurance.
Particulars Amount
As on FY18, it has an AUM of | 15555 crore (~24% derived from utility
Market Capitalisation | 4890 crore vehicles/cars, ~8% from commercial vehicles, ~6% from commercial
GNPA (FY18) | 1089 crore equipment, ~16% from used assets, ~16% from agri finance (including
NNPA (FY18) | 809 crore tractors), ~13% from SME loans, ~18% from mortgages). It has a
NIM % (FY18) 8.8% network of 305 branches with 9 lakh active customers as on March 2018.
52 week H/L 192.9/ 119.1
Magma had seen huge slippages in FY16 with reported GNPA ratio hitting
Net worth | 2319 Crore
10% led by tractor segment which had high concentration of 27% in loan
Face value |2
portfolio and worsened by agri monsoon woes. Post that a strategic
DII Holding (%) 22.1
FII Holding (%) 40.7 change towards reduction in single product concentration mix was
ensured and consolidation in loan book with increased provisions done in
Price Movement FY17. Thereby though FY17 & FY18, NII was at | 1274 crore and | 1393
crore respectively, PAT was lower at | 20.5 crore in FY17 due to huge
12,000 210
provisions at |660 crore. Again PAT came back to | 230.4 crore in FY18
10,000 180
due to moderation in provisions. It also undertook significant top
8,000 150
management changes in 2016 with each business line having
120
6,000 independent MD/CEO with the promoter having 24.4% stake maintaining
90
4,000 60
the vice chairman position. Asset backed finance segment is now
2,000 30 managed by Mr. Kaushik Banerjee (from Chola finance).
0 0 Triggers
Jun-15
Oct-15
Feb-16
Jun-16
Oct-16
Jan-17
May-17
Sep-17
Jan-18
May-18
Moving out of asset consolidation, triggering growth of 15-18% in AUM
Magma Fincorp has exposure to vehicle finance i.e. asset backed portfolio
MAG (R.H.S) Nifty (L.H.S)
at 69.9% of AUM, SME (12.5%), mortgage (17.6%M) and general
insurance. The loan book was at | 12039 crore AUM at | 15555 crore.
Research Analyst Government measures on shift to BS IV and good monsoons are seen
Kajal Gandhi helping faster revival in rural areas & recovery of old NPAs. Going ahead,
[email protected] focus would be across segments with single product concentration mix
kept in control. In the last two quarters, disbursement growth has picked
Vasant Lohiya up with 51% YoY growth at | 1592 crore in Q4. Used vehicles and CV are
[email protected] seeing strong traction. The huge opportunity and capital adequacy of
25% would allow expected AUM growth of ~15-18% YoY to be achieved.
Vishal Narnolia Sustainable margins, contained credit cost on NPA to boost RoA…
[email protected] Magma has reduced GNPA to 7% from ~10% in the last three years
despite a declining loan book. Though provision coverage ratio is low at
27.7% at NNPA ratio of 5%, we expect most of the legacy pain is over as
average duration is 2.5-3 years of loans. Margins are expected to remain
stable at ~8-8.5% with credit costs contained at 150-170 bps (FY18: 270
bps). With this, we expect the management to achieve the guidance of
RoA >2% by FY20 from reported 1.5% and RoE improving from 10% to
11-12% by FY20E (post QIP equity dilution).
Reasonable valuations and turnaround play
Magma Fincorp was trading at subdued valuations due to its slippages
from FY14 and peaking in FY16. The stock is currently trading close to
1.9x trailing BV and 1.5x FY20E BV. Considering the strong retail portfolio
with 60-65% book classified for PSL category offering securitisation
benefits, these valuations look reasonable. We believe that for RoE of 11-
12% and RoA of >2% by FY20, the stock can trade at 2.3x FY20 P/ABV.
Exposure to general insurance business through Magma HDI remains an
added positive. Factoring in the new focused management and improving
margins and return ratios we value Magma at | 230 per share, i.e. 2.3x
ABV and 16x P/E on an FY20E basis. We have a BUY recommendation
from a 12-15 month’s perspective.
ICICI Securities Ltd | Retail Equity Research
Exhibit 1: Financial Performance (Standalone)
FY15 FY16 FY17 FY18
P&L
NII (| crore) 1,153.0 1,314.7 1,274.0 1,393.1
Operating profit (| crore) 3,110.1 3,888.2 4,368.2 2,585.4
Net Profit (| crore) 180.7 211.4 20.5 230.4
Balance Sheet
Net worth (| crore) 1,787.5 2,164.3 2,172.1 2,319.0
AUM (| crore) 19,567.0 18,183.0 16,101.0 15,555.0
Borrowings (| crore) 9,898.2 10,317.7 10,096.0 9,829.0
Ratios
Net Interest Margins (%) 6.2 7.0 7.4 8.8
ROE 9.6 11.1 1.0 10.4
ROA 1.3 1.4 0.1 1.5
P/E 27.6 23.6 na 21.6
BV 93.9 92.4 91.5 97.9
P/BV 1.9 2.0 2.0 1.9
Gross NPA (% of AUM)* 3.9 8.1 8.8 7.0
Net NPA (% of AUM)* 2.9 7.0 7.2 5.2
Source: Company, ICICI Direct Research * 90 days past due basis for FY17 and FY18.
Exhibit 2: AUM breakup (o/s on book AUM- | 12039 crore, balance is off book AUM)
AUMbreakup FY15 FY16 FY17 FY18 FY18 (Propn)
UV/Cars 4,989.6 4,527.6 4,073.6 3,671.0 23.6
CV 2,602.4 1,654.7 1,046.6 1,228.8 7.9
CE 1,917.6 1,454.6 1,062.7 980.0 6.3
Used Assets 2,328.5 2,036.5 1,835.5 2,442.1 15.7
Agri Finance 3,482.9 3,418.4 3,171.9 2,551.0 16.4
SME Finance 1,389.3 1,727.4 1,883.8 1,944.4 12.5
Mortgage Finance 2,856.8 3,363.9 3,027.0 2,737.7 17.6
Total AUM 19,567.0 18,183.0 16,101.0 15,555.0 100.0
Source: Company, ICICI Direct Research
ICICI Securities Ltd | Retail Equity Research Page 2
RATING RATIONALE
ICICI Direct Research endeavours to provide objective opinions and recommendations. ICICI Direct Research
assigns ratings to its stocks according to their notional target price vs. current market price and then
categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and
the notional target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
ICICI Direct Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
[email protected] ICICI Securities Ltd | Retail Equity Research Page 3
ANALYST CERTIFICATION
We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research
report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s)
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ICICI Securities Ltd | Retail Equity Research Page 4
