Magma Fincorp

Company Boasts Of Lower Valuations, High Asset Quality & Above-Average NIM

 

MAGMA Fincorp's stock has been on an upward trajectory over the past few months while the benchmark Sensex remained more or less flat. Its stock has gained 54% since the start of December 2009, while Sensex fell by 2%. However, during the past one year, the stock has under performed the Sensex.

   A non-banking financial company (NBFC), Magma offers financing for commercial vehicles, passenger cars and construction equipment. The three categories together accounted for 87% of disbursements for nine months ending December 2009. The strength of its business model lies in the fact that it is well-diversified with a presence in several markets, which makes it less risk-prone. Even in terms of location of branches, its presence is well diversified, with 151 branches across 21 states.

   The company has also entered the used commercial vehicle market, small and medium enterprises and tractor loans. The advantage of entering into these markets is that such loans offer high yields, thus pushing up the company's net interest margin (NIM), which is the difference between cost of funds and yield on funds.

   For instance, Magma's NIM rose to 5.1% in the nine months ending December 2009 from 3.6% in the previous fiscal. The management has indicated that the share of high-yielding products will increase in future — a move, which will propel its earnings. Meanwhile, the collection efficiency of the company improved to 99.2% in the December 2009 quarter from 95.7% during the corresponding period a year ago. Such a level of collection efficiency indicates high-asset quality.

   Going forward, its earnings are likely to grow at higher rates, thanks to the revival in infrastructure lending and commercial vehicle market. At present, the stock is trading at 10 times its earnings. Though a strict comparison is not possible within the industry, its valuations are on the lower side compared to other NBFCs, given its high asset quality and above-average NIM.

   The stock has under performed the benchmark over a long term. Given reasonable valuations, and high expected growth rates, the stock could move up in the near term.