Narnolia

Magma Fincorp (Buy)

CMP: ₹140.15

Target: ₹165

Magma reported improved 1QFY19 numbers with positive AUM growth of 0.7 per cent/(-0.1) per cent on y-o-y/q-o-q basis. Net interest income (NII) grew by 9 per cent y-o-y. NIM has increased to 8.6 per cent from 7.6 per cent y-o-y due to expansion in the yields. However opex grew by 15 per cent y-o-y, total income grew by 11 per cent y-o-y, which led to raise in the cost to income (C/I) ratio by 182 bps to 49 per cent from 47.32 per cent. Other income has increased by 51 per cent y-o-y. PAT has registered a robust 76 per cent y-o-y growth. Gross stage 3 GNPA marginally deteriorated to 9.50 per cent from 9.30 per cent q-o-q while Net stage 3 NNPA has decreased to 4.40 per cent from 4.50 per cent q-o-q. Stage 3 provision stands at is 56 per cent as on 1QFY19.

View and valuation: Magma has been in consolidation phase of business model over the last three years and now with the improvement in business scenario it is likely to post 33 per cent PAT CAGR over FY18-20. It has also witnessed improvement in assets quality even after IND-AS application. Transition to the IND-AS norms has negatively affected the net worth by ₹370 crore due to higher ECL provisioning requirement.

Going ahead we believe margin may be slightly in pressure due to rising share of lower yielding assets and continuously rising bond yield scenario. Management is optimistic of the growth and has guided for 25 per cent disbursement growth and 15-16 per cent AUM growth going ahead. Owing to expected margin pressure and reduced net worth, we reduce our target price to ₹165 at 1.4x P/BV FY20e. We maintain ‘buy’.

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