Stock Review: Magma Fincorp

 

Improved Asset Quality, High Growth In Bottomline To Support Stock Going Forward

 

THE stock of Magma Fincorp has outperformed the benchmark Sensex in the current rally. Since April, it has gained 33% compared with the 13% rise of the Sensex. The stock touched its 52-week high of 84 on October 4.

   Investors have shown great interest in the scrip following the company's impressive profit growth in the past few quarters. The September 2010 quarter has been no different. Net profit of the company grew by 67% year-on-year. A possible reason for the surge could be its operations in the high-yield segments.

   The company was predominantly in the business of financing construction equipment, passenger cars, utility and commercial vehicles (CV). However, it recently ventured into the high-yield segments, such as used-CV, tractors, small- and mediumenterprise loans. Both the used-CV and tractors businesses saw a triple-digit growth in disbursements y-o-y in the September quarter. Overall, disbursements grew by 28% in September compared with the year ago period.

   Operations in the high-yield segment have also boosted the company's net interest margin (NIM) – the spread between a company's lending and borrowing costs. For the first half of the current fiscal, the NIMs stood at 5.4%. In fact, NIMs have been hovering around this level for the last five quarters.

   While disbursements have grown at a high rate and margins improved substantially, asset quality has remained intact. The write-offs for the six-month period starting April 2010 have been 0.3% of its total assets, compared with 0.4% a year ago. What is commendable is that the asset quality has improved despite the share of high-yield products increasing in the loan portfolio. High-yield products formed 17% of total disbursements during the first half of FY 2011, compared with 12% a year ago.

   At a price-to-earnings ratio of about 14.4, the company is still trading at a discount to its historical all-time high valuations. A high growth in its bottomline coupled with an improved asset quality might support the company's stock going forward.

Operations in the high-yield segment have boosted the company's net interest margin.

For the first half of the current fiscal, the NIMs stood at 5.4%.

 

At a price-to- earnings ratio of about 14.4, the company is still trading at a discount to its historical alltime high valuations.