Magma Fincorp’s (Magma) Q3FY21 earnings were a mixed bag as rise in vulnerable pool (stage-2 plus stage-3) and higher credit cost (>500bps) were offset by stringent cost controls and better NIMs (due to focus on high-yielding products). MoM improvement in collection efficiency (97% in Jan’21) and overall provisioning buffer of 5.3% suggest that stress should peak out soon. Strategically, Magma has stopped sourcing low-RoA products (namely new cars, CV, CE, etc.) and will deploy the capital release towards focused products (used assets, tractors, housing). While this will structurally enhance margins and return profile, it will also lead to balance sheet consolidation and modest AUM growth in the interim. Business reorganisation and consolidation phase has depressed the valuation multiple sub-0.5x, but is now looking up (from medium-term perspective). Also, value discovery in housing finance and general insurance, being in an advanced stage, can be a key rerating trigger. Upgrade to BUY with a revised target price of Rs95 (previously: Rs40) assigning a multiple of 0.8x consolidated FY23E book value.
– Focus on collections; efficiency improving MoM: Collection efficiency has been improving MoM and reached 97% in Jan’21 from 94%/90%/90%/85% in Dec / Nov / Oct / Sep’20. For the asset finance business, collection efficiency of 98.8% is almost at pre-Covid levels. With recovery and resolution efforts, customers in moratorium portfolio, who have not paid even one EMI till Dec’20, are consistently declining and now stand at Rs2.8bn (1.9%, down from 3.8%/9.6% in Oct/Sep’20).
– Stage-2 plus stage-3 pool (including restructuring) widens to 18.8%: Proforma gross stage-3 assets have risen to 6.9% (from 5.1%/5.8% in Q2FY21/Q1FY21) and consequently net stage-3 expanded to 4.5% (from 3.2% in Q2FY21). Stage-2 assets too spiked to 11.8% in Q3FY21 (from 5.4% in Q2FY21). The vulnerable pool (stage-2 plus stage-3), compared to 16% at the end of Mar’20 has now widened to 18.8%. Nonetheless, this includes the restructured portfolio worth Rs2.8bn (1.9% of AUM) till date, on which the company is carrying provisioning of 15%. It expects overall restructured portfolio at 4.5-5.0% by Mar’21 (compared to earlier guidance of 3%). Further flow-through into stage-2 and stage-3 will be the key risk to earnings.
– Bucket-wise movement leads to higher credit cost; should peak out now: Movement of Covid-stressed portfolio to higher bucket led to higher credit cost of >500bps (provision of Rs1.82bn was made in Q3FY21). After utilising some portion of the contingency buffer, contingency provisioning is now down to Rs1.5bn (1.1%) from Rs2.4bn (1.5%) in Q2FY21. Repossession, release and settlement cases are returning to pre-Covid levels, which is also reflected in loss on settlement/repo. Coverage on stages-1&2 assets stays flat at 3.0% and provisioning on on-balance sheet assets is up 50bps QoQ to 5.3%. With strategic shift in business mix, we are building-in credit cost of 3.0-3.5% over FY21E/FY22E/FY23E.
– Strategy reorientation continues – focus on high-RoA products: Disbursements saw an uptick to Rs12bn (vs Rs8.3bn/Rs2.2bn/Rs20bn in Q2FY21/Q1FY21/Q3FY20). However, vehicle finance portfolio is being reshaped towards high-RoE focused products. With 100% incremental disbursals comprising used vehicles, affordable housing finance, SME loans and tractors, the proportion of focused products has improved to 58%. Company has stopped sourcing low-RoA products like new cars, CV and CE, hence AUM ran down 3.6% QoQ and 10% YoY to Rs150bn. Focused product AUM was almost flat YoY at Rs111bn (constituting 74% of total AUM). The current non-focused AUM run-off is envisaged to release equity capital of over Rs2.1bn 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.
– Cost control to the extent of 70bps of total AUM: Operating expenses were contained (down 6% QoQ / 23% YoY) with the ‘opex to AUM’ ratio settling at 3.3%. 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.
– Magma Housing Finance (MHFL) – carving out a niche in affordable housing space: MHFL continues to make a niche for itself in the specialised affordable housing segment. Capital-raising process is underway and it has received healthy preliminary interest from potential investors. It is hopeful of receiving firm investor interest in next 2-3 months. Magma intends to keep prospective investors’ preferences in mind while finalising the reorganisation structure for MHFL. Disbursements in this business has reached ~80% of pre-Covid levels and AUM grew 2% QoQ / 10% YoY. Gross stage-3 assets increased to 1.9% (from 1.6% in Q2FY21) and almost 1.8% of the portfolio is restructured. This business generated an RoE of 1.2% in 9MFY21 (vs 1.5% in FY20).
– Magma HDI General Insurance – focus on retail and SME group health: Gross written premium was flat YoY in Q3FY21 and down 4% for 9MFY21. The business is witnessing some strategic shift with increased contribution of banca (6.7%) and corporate sales/broking. The continued focus on retail health and SME group health has led to exponential growth in these portfolios. Magma HDI has received firm interest from a few investors for participation in a capital raise process; it hopes to reach a definitive alignment in the foreseeable future. Key risk being further deferment in the capital raising process that can delay the re-rating (as capital raise in housing and general insurance is being evaluated for a while now and fructification of transaction will be key).
Shares of MAGMA FINCORP LTD. was last trading in BSE at Rs.98.05 as compared to the previous close of Rs. 93.4. The total number of shares traded during the day was 10327 in over 39 trades.
The stock hit an intraday high of Rs. 98.05 and intraday low of 98.05. The net turnover during the day was Rs. 1012562.
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