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Our take

Magma Fincorp’s (MFL) ownership and management has undergone a change after the Poonawalla group bought a 60% stake in the company. It is now a subsidiary of Rising Sun Holdings Pvt Ltd (owned and controlled by Mr Adar Poonawalla), subsequent to raising of equity funds of Rs 3,456cr on 06 May 2021. Since then, it has realigned strategy to exit stressed businesses like used CV/CE and tractor loans and is entering product lines like professional loans, consumer durable loans, home loans, and medical equipment loans, all of which are high growth products.

Post the capital infusion, MFL has one of the strongest balance sheets (CAR of 69.8%) in the industry, but the worst leverage at 1.3x. It has ample room to grow its AUMs without diluting further equity. The management intends to grow AUMs 3x by FY25, mainly driven by reduction in cost of funds and expansion of product offerings and customer base. Also, the company aims to control net NPAs below 1% level.

MFL has also infused Rs 500cr in its subsidiary Magma Housing Finance (post infusion, net worth is Rs 1,000cr; Tier 1 capital ~53%), which has grown its AUM at 17% CAGR over FY18-FY21 with its share in consolidated AUMs increasing from 18% in FY19 to 31% in FY21. With a strong group backing it and a cleaner balance sheet, the company’s credit rating would improve and cost of funds would moderate, going forward, which would drive profitability and return ratios.

The credit loss buffer built by the company and cumulative provision of Rs 1,192cr should be adequate to counter any COVID-related impact on profitability in the future. Rationalisation of its existing network of 297 branches and expansion to new locations should improve branch-level profitability. Also, greater reliance on electronic modes of collection and lending could bring down costs and enhance distribution capabilities for the revised product suite.

Valuation and recommendation

We feel Magma will achieve enhanced operating metrics and return profile in the medium term due to strong corporate group backing, >68% CAR (post infusion), improved credit rating outlook, and business competitiveness. The new promoters in addition to increasing the business in select areas in MFL may also look to unlock value in the subsidiaries at a future date.

We expect a 20% CAGR growth in advances over FY21-FY23. Calculated NIM is expected to expand by 90bps to 9.3%, driven by lower cost of funds. RoA is expected to improve to 2.7% by FY23E. Investors can buy the stock at CMP and add on dips to Rs 134-136 band (1.7x FY23E ABV) for a base case fair value of Rs 167 (2.1x FY23E ABV) and bull case fair value of Rs 191 (2.4x FY23E ABV) in the next two quarters.

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