Rating agency CRISIL has assigned a valuation grade of 5/5 to Magma Fincorp Ltd, indicating that market price has ‘strong upside’ from the current levels.

In a release CRISIL said the grade indicates that the company’s fundamentals are ‘good’. The assigned fundamental grade factors in Magma’s established presence in the target market and its strong growth record (disbursements grew by 24 per cent CAGR over FY07-12).

“Magma’s loan book (including off-book assets) is estimated to grow at 30 per cent CAGR from Rs 12,000 crore in FY12 to Rs 20,500 crore in FY14,” CRISIL said.

The grade also considers the expected increase in average yields from 15.1 per cent in FY12 to 16.7 per cent in FY14 driven by the increase in share of high-yield products in the loan book and booking of income on assets securitised in FY12. Also, Magma has improved its asset quality and reduce bad debt write-offs (as a percentage of loan assets) from 0.66 per cent in FY08 to 0.2 per cent in FY12.

Caution

The rating agency, however, pointed out that Magma faces stiff competition from its peers; especially those belong to larger conglomerates and have a larger presence. It constrained CRISIL’s grade.

“Magma’s return on assets (RoA) is lower compared to that of its peers because of its relatively low-yielding loan book and high borrowing costs. Un-seasoned, fast growing loan book, increased focus on high-yield, high-risk products and a weak economic environment may affect Magma’s asset quality leading to higher write-offs over the next two years,” CRISIL added.

It further said that given the dynamic regulatory environment, any change in regulation may adversely affect the business models of Magma.

Outlook

Magma’s FY12 net profit was impacted following its transition to a conservative accounting policy for booking of securitisation income. CRISIL expects operating income to increase to Rs 945 crore at 47 per cent CAGR over FY12-14 with loan book posting 30 per CAGR and an increase in portfolio yield over the same period.

Net profit will grow faster at 67 per cent CAGR over FY12-14 to Rs 207 crore as operating leverage kicks in and on account of a low-base in FY12. RoA is expected to improve to 1.6 per cent in FY14.

“Our fair value of the stock is Rs 90 per share”, CRISIL said. The stock closed at Rs 66.90, down 1.33 per cent, on Monday on the BSE.

(This article was published on July 16, 2012)
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