Narnolia Financial

Magma Fincorp (Hold)

CMP: ₹127.4

Target: ₹144

Due to liquidity issue in NBFC, Magma Fincorp’s loan growth has been remaining under pressure. It has not been able to pass on the rise in cost of fund to its customer which has impacted the NIM. Going ahead management expects to pass on only 25-50 bps in SME & ABF (asset-based finance) so we expect margins to remain under pressure in the medium term till cost of fund shows some sign of relief. However, in the long run to boost the margin, management is focussing on changing the portfolio mix towards (high yielding assets).

Asset quality has shown improvement as management focuses on collection, which resulted in increase in collection efficiency to 100 per cent. Hence, we expect credit cost to remain under control going ahead in the range of 1.25-1.6 per cent. Management is optimistic of 20 per cent disbursement growth and reduced its AUM guidance to 12 per cent-13 per cent from 15-18 per cent earlier. Factoring NIM compression and slower AUM growth we reduce our earnings estimates by 6 per cent in FY20.We value the stock at 1.1 P/B FY21e to Rs 144.

Risks: a) Lower delinquency to result in lower credit cost; b) Ability of management to pass on the rising cost.

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