Stock Review: Magma Fincorp

Auto financing NBFC Magma Fincorp posted a marginal fall in net profit by 6% in the June quarter. The management's strategy to reduce its dependence on revenue from securitisation of loan portfolio impacted profits. Other operating parameters of the company such as loan disbursal and NIM continued to be robust. Kolkata-based Magma Fincorp is primarily engaged in financing of commercial vehicles, cars, construction equipment, tractors and utility vehicles. Magma is largely present in rural and semi urban areas with a diversified business model.

Loan disbursals grew 36% in the June quarter and revenue rose 25%. However, Magma's profit margin fell due to change in business strategy of using securitisation more as treasury activity rather than funding activity. Earlier the company sold off (securitised) almost 50% of its loan portfolio, which generated cash revenue. For instance, in the June 2010 quarter, securitisation of the loan portfolio generated almost . 27 crore, or 17%, of total revenue. However, such high dependence on securitisation led to higher proportion of off balance sheet assets under management. Magma has now resorted to decrease securitisation which will help the company strengthen its balance sheet, but this will also strain the company's profits in next few quarters.

 
Further, strengthening of balance sheet will allow the company to raise more funds. It has recently raised . 440 crore through private equity deals. The NBFC also plans to raise . 1,000 crore for its tier II capital requirement.

However, a hitch of non-securitisation is that it may pose risk of higher non-performing assets (NPA). Magma enjoyed zero NPA when most of its peers had NPA above 0.5 % as on March 2011.

Low profitability in the June 2011 quarter was also a function of interest cost which rose by 65% to . 121 crore. However, the company successfully managed a sequential rise in its net interest margins (NIM) by 20 basis points (bps) to 4.6% by passing on the higher cost of borrowing to the customers. Magma raised its lending rates by 140 bps on a year-on-year basis to negate the effect of 150 bps rise in the cost of borrowing.

At a P/E ratio of 11.5, Magma's stock seems to be overpriced compared to peers. Although the company has been improving its operating performance by focusing on high yielding segments for loan disbursals, non-securitisation may lead to low profits in the coming quarters