CRISIL Research Report Magma Fincorp 2012

8/11/2019 CRISIL Research Report Magma Fincorp 2012

1/32

MA K IN G M A R K E T S

F U N C T I

O N

B E T

T E R

YEARS

Apollo HospitalsEnterprise Ltd

CRISIL IER IndependentEquityResearch

Enhancing investment decisions

Detailed Report

Magma Fincorp Ltd

Initiating coverage


2/32

CRISIL IERIndependentEquityResearch

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysisof Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a

five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-

point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISILFundamental Grade Assessment

CRISILValuation Grade Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)3/5 Good fundamentals 3/5 Align (+-10% from CMP)2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)1/5 Poor fundamentals 1/5 Strong downside (


3/32


F U N C T I

O N

B E T

T E R

YEARS Magma Fincorp LtdRiding the rural growth story

Fundamental Grade 3/5 (Good fundamentals)

Valuation Grade 5/5 (CMP has strong upside)

Industry Consumer finance

1

July 16, 2012

Fair Value Rs 90CMP Rs 66

For detailed initiating coverage report please visit: www.ier.co.inCRISIL Independent Equity Research reports are also available on Bloomberg (CRI ) and Thomson Reuters.

Kolkata-based Magma Fincorp Ltd (Magma), a non-deposit taking non-banking financial

company (NBFC), offers financial services - mostly vehicle loans - to rural and semi-ruralconsumers. A diversified and increasing presence in rural and semi-rural regions will driveMagmas loan book growth. Also, higher contribution from high-yield products will boostaverage portfolio yields. Magmas ability to manage asset quality in the light of fast loan bookgrowth and its focus on high-yield, high-risk products are monitorables. We initiate coverageon Magma with a fundamental grade of 3/5, indicating that its fundamentals are good relativeto other listed securities in India.

Magma to benefit from rise in rural financing needs; to focus on high-yield productsCRISIL Research believes that NBFCs such as Magma score over banks in the rural/semi-rural markets due to wider reach, higher operational flexibility, faster service and in-housecollection/recovery infrastructure. Magma will add 50 branches over the next two years to theexisting network of 200 branches. With over 80% of these branches in rural/semi-rural areas,it is well positioned to capture the rise in demand for funding in these regions; we expect itsdisbursements to log 32% CAGR over FY12-14. Magma is focused on increasing the shareof high-yield products (tractors/used CVs/SME loans) in its loan book; we expect the share toincrease from 20% in FY12 to 30% in FY14. We, thus, expect net interest margin (NIM) toimprove from 5.5% in FY12 to 6.7% in FY14.

Faces stiff competition from established NBFCsMagma faces stiff competition from NBFC peers who have a larger presence. Magma has alow-yielding loan book and high borrowing costs which lead to lower return on assets (RoAs)compared to peers. Also, Magmas ability to continue securitisation under the revisedguidelines will impact its borrowing costs.

Asset quality, though well-managed, is a monitorableMagmas bucket-wise collection team structure has ensured good asset quality. Its bad debtwrite-offs as a percentage of loan book declined from 0.66% in FY08 to 0.2% in FY12 thoughopex cost (as % of AUM) was high at 4.2%. However, given the fast growth in loan book andfocus on high-yield, high-risk products, the asset quality will be a monitorable.

Net profit to grow at 67% CAGR over FY12-14CRISIL Research expects the 30% CAGR over FY12-14 in loan book along with increase inportfolio yield to drive 4 7 % CAGR in operating income. Net profit will grow faster at 67%CAGR over FY12-14 to Rs 2,067 mn as operating leverage kicks in and due to normalisationof change in the accounting policy. RoA will improve to 1.6% in FY14.

Valuations: Current market price has strong upsideCRISIL Research has assigned a P/B multiple of 1.2x to FY14E book value to arrive at a fairvalue of Rs 90 per share. At the current market price of Rs 66, our valuation grade is 5/5.

KEY FORECAST

(Rs mn) FY10 FY11 FY12 FY13E FY14ETotal operating inc ome 3,980 5,217 4,376 6,990 9,453Pre-provision profit 1,837 2,456 1,641 3,170 4,636

Adjusted net profit 701 1,201 740 1,441 2,067EPS 6.6 9.3 3.9 7.6 10.9P/E (x) 10.3 7.2 17.0 8.7 6.1P/ABV (x) 2.1 1.5 1.2 1.0 0.9RoE (%) 16.1 20.2 7.9 11.7 15.1RoA (%) 1.8 2.3 1.1 1.5 1.6Write-off as % of assets 0.5 0.3 0.2 0.3 0.5Capital adequacy ratio (%) 12.2 15.8 19.6 17.0 15.5

NM: Not meaningful; CMP: Current market price;

Source: Company, CRISIL Research estimates

CFV MATRIX

KEY STOCK STATISTICSNIFTY/SENSEX 5227/17214NSE/BSE ticker MAGMA /MAGMAFINFace value (Rs per share) 2Shares outstanding (mn) 190Market cap (Rs mn)/(US$ mn) 12,579/22952-week range (Rs)/(H/L) 78/45Beta 0.7Free float (%) 66%

Avg daily volumes (30-days) 11,898 Avg daily value (30-days) (Rs mn)

0.8 SHAREHOLDING PATTERN

PERFORMANCE VIS--VIS MARKETReturns

1-m 3-m 6-m 12-mMAGMA 14% -2% 15% -9%NIFTY 2% 0% 7% -6%

ANALYTICAL CONTACTMohit Modi (Director) mohit.modi@crisil .comOnkar Kulkarni onkar.kulkarni@cris il.com Vishal Rampuria [email protected]

Client servicing desk+91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

F u n

d a m e n

t a l G r a

d e

PoorFundamentals

ExcellentFundamentals

S t r o n g

D o w n s

i d e

S t r o n g

U p s i d e

33.7% 33.7% 33.7% 33.7%

43.3% 41.8% 42.7% 42.7%

13.7% 13.7% 13.7% 13.7%

9.2% 10.8% 9.9% 9.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sep-11 Dec-11 Mar-12 Jun-12

Promoter FII DII Others


4/32


2

Table 1: Magmas - Business environment

Parameter

Conventional loan products High-yield loan products

Cars & multi-utilityvehicles (MUVs)

Commercial

vehicles

(CVs)

Construction

equipment

(CE) Tractors

Usedvehicles

(Suvidha) SME

Loan book contribution FY12 27% 34% 19% 10% 5% 5%

Loan book contribution FY14E 30% 22% 18% 15% 10% 5%

Loan book growth FY10-12 31% 10% 2% 124% 61% 65%

Loan book growth FY12-14E 38% 6% 27% 60% 87% 19%

Product offering / marketsegmentation

Loans to rural andsemi-rural customers

Loans to first-timebuyers; single truckowners

Loans to first-timebuyers / loans toconstructionplayers (strategic

customers) forlarge equipment

Ruralcustomers

Loans tofirst-timebuyers

Small andmediumbusinesses inurban/rural/

semi-ruralareas

Average ticket size (Rs mn) 0.36 1.48 1.83 -12.03 0.32 0.50 2.91

Loan-to-value (%) 66% 75%

(90% - withoutconsidering the cost ofvehicle body)

56-79% 62% 72% NA

Average tenure (months) 43 43 37-40 46 34 30

Average yield (%) 14.2% 13.0% 12.8-13.5% 20% 19.2% 16.7%

Geographic presence Pan-India presence with equal distribution of branches across regions

Key players/

competitors

Public sector banks with wide network of branches and low cost of funds are its primary competitors in rural areas.

In urban areas, it has to compete with private sector banks in areas of car financing and SME loans. Shriram CityUnion Ltd (Shriram City), Shriram Transport Finance Ltd (Shriram Transport), Cholamandalam Investment Finance

Ltd (Cholamandalam), Sundaram Finance Ltd (Sundaram), Mahindra & Mahindra Financial Services Ltd (M&M

Finance) are key competitors

Underlying sales volumesgrowth (FY12-17)

14-17% HCV: 9-11%

LCV : 14-16%

- 8-10% - -

Growth in financing 18-21% HCV: 18-20%

LCV : 20-22%

- - - -

Demand drivers - Rise in small carsales

-Growth in householdincome

- Improvement infinance penetration

- Improvement ineconomy, freighttraffic

- Increase in vehicleprices and rise inLTVs

- Proliferation of thehub-and-spoke modelto drive LCV growth

The constructionindustry isexpected to see

tepid growth dueto slowdown in theinvestment cycleover the next twoyears

Reducingreplacementcycle, stable

farm income andincreased focusof thegovernment onagriculturaldevelopment

Key risks Increased focus on high-yield segment increases the risk of non-performing assets. Ability to manage the NPAswill be a key monitorable

Change in securitisation market due to new securitisation regulations

Regulatory changes

Source: Company, CRISIL Research


5/32


F U N C T I

O N

B E T

T E R

YEARS Magma Fincorp Ltd

3

Grading Rationale

Primed to benefit from growth in rural/semi-rural financingMagma, a retail asset finance company, offers loans to the rural and semi-rural populace who

have limited or no access to normal banking channels. It focuses on the niche vehicle

financing market comprising first-time buyers (trucks, cars and MUVs), vehicle

drivers/operators aspiring to become owners (trucks and construction equipment), small farm

land owners (tractors) and small business owners (cars, MUVs and LCVs). A decade-long

experience in these markets has helped Magma understand the customers loan requirements

and repayment trends, which will help it to scale up its business and manage asset quality. It

now plans to launch new products such as gold loans and affordable housing finance to the

same customer profile.

CRISIL Research expects Magmas disbursements to increase at a two-year CAGR of 32%

following the rise in financing needs of the rural/semi-rural population. Near-term slowdown

notwithstanding, we expect vehicle sales to report healthy growth over FY12-17 (vehicle

financing forms 94% of Magmas disbursements). We expect Magmas disbursements to grow

faster than the industrys driven by a) 25% increase in its branch network over the next two

years, b) focus on car and MUV sales in rural regions, and c) small base for products such as

tractors and used CVs.

Figure 1: Disbursements of NBFCs catering to rural markets growing strong

Total disbursement of eight NBFCs oriented towards rural financing

Source: Presentations of companies, CRISIL Research

Demand has moderated but growth in certain segments still strong

Vehicle sales registered a slowdown in FY12 on account of poor economic environment and

high interest rates but certain segments of the industry recorded strong growth. The demand

for cars, UVs and tractors in the rural and semi-rural regions remained buoyant. While HCV

sales were adversely impacted by macro-economic issues, LCV sales grew at 30% in FY12.

CRISIL Research expects vehicle sales to remain sluggish over FY13 but improve FY14

onwards as the GDP growth recovers and interest rates cool off.

268 380 359 475 712 920

42%

-5%

32%

50%

29%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-

100

200

300

400

500

600

700

800

900

1,000

FY07 FY08 FY09 FY10 FY11 FY12

(Rs bn)

Disbursements Growth (RHS)

Magma finances vehiclebuyers with low or no access

to normal banking channels

Rural demand has remainedbuoyant


6/32


4

Figure 2: Car industry witnessed tepid growth in FY12 Figure 3: Marutis rural sales grew at a steady pace*

Ex-Maruti, the industry grew at 15% in FY12 vs. 30% in FY11 * Slowdown partly due to strike at Marutis factories

Source: Company, CRISIL Research Source: Company, CRISIL Research

Figure 4: Tractor sales also slowed down Figure 5: HCV sales moderated but LCV growth intact


Long-term gr owth drivers of vehicle financing industr y intact

CRISIL Research reasons that despite the near-term slowdown, the growth prospects of the

vehicle financing industry over the next five years are strong. We expect the car and MUV

financing industry to post 18-21% CAGR over FY12-17 driven by 14-17% increase in vehiclesales and deeper finance penetration. The growth in car and MUV sales will be driven by the

small car segment and sales in rural/semi-rural regions. In the CV industry, we expect LCV

sales to grow faster (14-16%) than HCV sales. Sales growth combined with under-penetration

of financing in LCV sales will result in the LCV financing industry posting 20-22% CAGR over

FY12-17.

1,380 1,548 1,552 1,951 2,521 2,640

12%

0%

26%29%

5%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

-

500

1,000

1,500

2,000

2,500

3,000


('000 Nos)

Cars & UV sales Growth (RHS)

1% 21% 30% -11%

161%

114%

63%11%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

FY09 FY10 FY11 FY12

Growth in overall sales Growth in rural sales

319 303 305 403 482 530

-5%

1%

32%

20%

10%

-20%

-10%

0%

10%

20%

30%

40%

0

100

200

300

400

500

600


('000 Nos)

Tractor sales ('000 Nos) Growth (RHS)

-4%

-37%

35% 37%

9%12%

-8%

46%

25% 30%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

FY08 FY09 FY10 FY11 FY12

HCV y-o-y Growth LCV y-o-y Growth


7/32


F U N C T I

O N

B E T

T E R


5

Table 2: Industry growth for various segments of vehicles

Contribution toMagmas FY12disbursement *

Growth in vehicle

sales volumes

Growth in vehicle

financing

Key growth driversin

FY13over

FY12-17in

FY13over

FY12-17

Cars30%

10-13% 15-17% 14-15% 20-21%Vehicle sales: Small cars will be the key contributor. Also, increase inhousehold incomesVehicle financing: Finance penetration to go up from 62-68% in FY12to 66-74% in FY17. Loan to value (LTV) to improve marginally MUVs 13-15% 14-16% 19-20% 18-19%

Heavy &medium CVs

28%

5-8% 9-11% 13-15% 18-20%

Vehicle sales: Improvement in economy, healthy freight traffic andincrease in construction activityVehicle financing: Increase in vehicle prices, rise in LTV from 75% inFY12 to 77% in FY17

Light CVs 16-18% 14-16% 21-23% 20-22%Proliferation of the hub-and-spoke model, growth in organised retail,improvement in rural road infrastructure

Tractors 11% 3-5% 8-10% NA NAFall in mandi prices below MSP will impact sales in FY13. Reducingreplacement cycles, stable farm income and the governmentsincreased focus on agricultural development to drive long-term growth

* The rest is contributed by construction equipment and SME loans

Source: CRISIL Research

Better r each, service will help NBFCs such as Magma gain market share

The consumer financing market is crowded with public sector and private sectors banks, and

NBFCs. In rural /semi-rural markets, NBFCs such as Magma score over banks due to their

wider reach, better service quality and higher flexibility in operations. CRISIL Research

believes these inherent advantages will allow NBFCs such as Magma to gain market share in

rural/semi-rural markets and grow their disbursements at a pace faster than the banks.

Table 3: Relative assessment of financers

Financing entityParameters Current market share

Reach Cost of funds Processing time Car financing CV financingPublic sector banks High Low High 25-30% 10-15%Private sector banks Low Low Low 45-50% 20-25%NBFCs High High Low 15-25% 35-40%

Source: CRISIL Research

But Magma will face stiff competition from established NBFC peersCRISIL Research believes established NBFCs with larger reach (branch networks) and with

some of them benefitting from group-companys presence in vehicle manufacturing give

Magma stiff competition in the rural/semi-rural financing market. Additionally, Magma will face

competition from existing players in the new markets (such as gold loans and affordable

housing loans) it plans to enter. Nevertheless, Magmas strong growth over the past two years

despite competition does provide some comfort.


8/32


6

Table 4: Magma will face competition from NBFCs across product offerings

Branches

Product offerings

Auto loans Loanagainst

propertyConsumerdurables

SMEloan

Personalloan

Goldloan

2 & 3wheelers

Cars&UV CV Tractor CE

Usedvehicle

Magma 200 X X* X X #

Mahindra Finance 606 X X X X

Sundaram Finance 579 X X X X X

Bajaj Finance 263 X X X X X

Shriram Transport 502 X X X X X

Shriram City 651 X X X X

Cholamandalam 375 X X

S. E. Investments 11 X X X X X X X X X

* Plans to enter, # recently launched

Source: Annual reports, investor presentations, CRISIL Research

Diversified and growing network to aid disbursement growth

Magmas 200 branches are spread across India. Nearly 80% of its branches are located in

rural/semi-rural areas, ensuring proximity to target customers. Each branch caters to a

catchment area of around 125 sq kms. It intends to add 50 branches over FY13-14. We

expect a well-diversified branch network to help Magma increase its reach, garner higher

market share and increase disbursements at 32% CAGR over FY12-14.

Figure 6: Regional break-up of branch network Figure 7: Branch network focussed on rural/semi-rural areas


South23%

East22%

West25%

North30%

Rural44%

Urban19%

Semi-rural37%


9/32


F U N C T I

O N

B E T

T E R


7

Figure 8: Growth in branch network to aid disbursements Figure 9: Disbursements to log 32% CAGR over FY12-14


Higher contribution by high-yield assets to boost returnsMagma is focussing on increasing the share of high-yield products (tractors, used CVs and

SME loans) in its loan book to increase average yields. We expect the contribution of high-

yield assets to loan book to increase from 20% in FY12 to 30% in FY14. Historically, Magmas

RoA is one of the lowest amongst its NBFC peers due to its low-yielding loan book and high

borrowing costs. However, with an increase in average yield on book and operating leverage,

we expect RoA to improve to 1.6% in FY14.

Low-yielding book and relatively high borrowing c osts affect RoAsMagmas borrowing costs are relatively higher than its NBFC peers costs. The low-yielding

book along with high borrowing costs has resulted in lower RoAs. Magma has been

securitising its assets to manage its funding requirements and costs. Given the recent

changes in regulations, its ability to continue securitisation will have an impact on its funding

costs.

154 161 150 153172

200225

250

0

50

100

150

200

250

300

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3 E

F Y 1 4 E

(Nos)

25 35 35 41 54 74 99 129

38%

-1%

17%

33%37%

34%31%

-15%

-5%

5%

15%

25%

35%

45%

-

20

40

60

80

100

120

140

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3 E

F Y 1 4 E

(Rs bn)



10/32


8

Figure 10: Financial comparison of Magma with other NBFCs*

Magmas low-yielding loan book ... and high cost of funds...

*Average yield for FY12 *Average cost for FY12)

Source: Company, Presentations,CRISIL Research Source: Company, Presentations,CRISIL Research

... have resulted in lowest NIMs ... and the lowest RoAs

For FY12 For FY12

Source: Company, Presentations, CRISIL Research Source: Company, Presentations, CRISIL Research

*Figures have been reclassified to make them comparable. The ratios may not match with reported ratios

Average y ield on book has been low due to product mixThough Magmas product-wise yields are comparable to that its NBFC peers, higher

contribution of low-yield products to its loan book is responsible for low average yields.

Magmas average yield of 15.1% in FY12 is the lowest amongst its NBFC peers as nearly

80% of its book consists of conventional products such as car loans, CV loans and

construction equipment loans. The yields in these products are ~13-14% compared to 19-20%

yields in used CVs, tractors, SME loans, etc. Most of Magmas retail-finance NBFC peers

operate in niche high-yield segments which have higher yields: Shriram Transport Finance in

used CVs, Mahindra Finance in tractors, Bajaj Finance in consumer durables, S. E.

Investments in SME loans.

15.1%

15.3%

14.4%

17.3%

17.2%

20.3%

19.1%

18.7%

0% 10% 20% 30%

Magma Fincorp

Cholamandalam Finance

Sundaram Finance

Mahindra Finance

Shriram Transport Finance

Bajaj Finance

SE Investment

Shriram City Union

11.6%

10.2%

8.6%

9.5%

11.4%

9.4%

11.3%

11.0%

0% 2% 4% 6% 8% 10% 12% 14%

Magma Fincorp


Sundaram Finance

Mahindra Finance


Bajaj Finance

SE Investment

Shriram City Union

6.2%

6.7%

7.2%

10.4%

10.0%

13.3%

13.0%

10.2%

0% 5% 10% 15%

Magma Fincorp


Sundaram Finance

Mahindra Finance


Bajaj Finance

SE Investment

Shriram City Union

1.1%

1.5%

2.9%

3.8%

3.7%

3.8%

5.6%

3.1%

0% 2% 4% 6%

Magma Fincorp


Sundaram Finance

Mahindra Finance


Bajaj Finance

SE Investment

Shriram City Union


11/32


F U N C T I

O N

B E T

T E R


9

Focus on high-yield products will boost yields going ahead

CRISIL Research expects Magmas average yield to increase from 15.1% in FY12 to 16.7% in

FY14 driven by higher contribution from high-yield products. Higher booking of securitisation

income will also drive average yields.

Magma plans to increase its average yield through greater focus on high-yield products such

as tractors and used CVs. Increase in share in Mahindra Tractors (market leader) and its 74%

subsidiary with International Tractors Ltd (manufacturer of Sonalika brand tractors) will help it

gain market share in the tractors segment. Moreover, within the low-yield products, Magma

has started to focus on loans for cars and UVs, which earn better yields than loans for CVs

and CEs. We believe Magmas slow growth in CV and CE loans is a reflection of the weak

economic environment. Hence, CRISIL Research expects high-yield products will comprise

~30% of the loan book in FY14 compared to 20% in FY12.

Figure 11: Disbursement mix Figure 12: Loan book mix


Magma securitised around Rs 30,700 mn of assets in FY12, on which it has realised a gain

(difference between yield on assets and cost of funds) of Rs 1,791 mn. However, in line with

the new accounting policy of amortisation of revenues, it has recognised Rs 198 mn of the

gain in FY12. The balance amount will be recognised over the next three-four years (average

tenure of loans). Also, income from incremental securitisation will be realised over the next

two years. This will further boost Magmas average yield.

92% 96% 91% 87%81%

77% 75% 74%

8% 4% 9%13%

19%23% 25% 26%

50%55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3 E

F Y 1 4 E

Low-yield products High-yield products

95% 95% 94% 92% 88%80%

74%70%

5% 5% 6% 8%12%

20%26%

30%

50%55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3 E

F Y 1 4 E

Low-yield products High-yield products


12/32


10

Figure 13: Income of securitised assets to boost yields Figure 14: Average yield on assets


In-house collection team helps maintain asset quality

Magmas organisation structure is different from most other NBFCs who follow a branch/SBU-

wise reporting structure (Magmas organisation structure is given in detail in the Company

Overview section). At Magma, separate national heads look after individual functions such as

sales, credit assessments, collections, operations, etc. Further, different teams are

responsible for different collection buckets (bucket indicates days by which payment is

delayed). Each collection team comes under separate national and regional heads. The

bucket-wise collection helps hone the teams skill sets required to handle the customers in the

particular buckets. A legal team helps the team handling the difficult-to-collect 180+ days

bucket to facilitate smooth recovery.

CRISIL Research believes this structure has helped Magma maintain good asset quality

compared to its peers. Since the implementation of this structure in FY08, the companys bad

debt write-offs have reduced from 0.66% in FY08 to 0.2% in FY12. However, due to high

growth in loan book, weak economic environment and focus on high-yield, high-risk products

the asset quality would deteriorate.

93%91%

92%

2% 5%5%

5%3% 3%

86%

88%

90%

92%

94%

96%

98%

100%

FY12 FY13E FY14E

I nt eres t on loan a ss et s Sec ur it is at ion inc om e Ot her inc om e

18.0%

16.6%

15.1%

16.3%16.7%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

18.5%

FY10 FY11 FY12 FY13E FY14E


13/32


F U N C T I

O N

B E T

T E R


11

Figure 15: Bucket-wise collection maintains asset quality Figure 16: Slippages are low


Operating leverage to kick in over FY13-14We believe Magmas current resources are capable of driving the growth in AUM and income

without high incremental costs. Its current strength over 5,000 employees is adequate to meet

its functional needs for the next two years. Hence, we expect operating leverage to kick in and

opex-to-average assets to slip from 4.3% in FY12 to 3.9% in FY14

Figure 17: Operating leverage


408 241 243 473 922

0.5%

0.3%

0.2%

0.3%

0.5%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

-

100

200

300

400

500

600

700

800

900

1,000


(Rs mn)

Write offs as % of AUM (RHS)

0.3%

-1.4%

0.0%

0.1%

0.5%

-0.5%

1.6%

0.5%

-2.0% -1.0% 0.0% 1.0% 2.0%

Magma Fincorp


Sundaram Finance

Mahindra Finance


Bajaj Finance

SE Investment

Shriram City Union

2,471 3,039 3,031 4,142 5,174

6.2%5.8%

4.3%4.2% 3.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

-

1,000

2,000

3,000

4,000

5,000

6,000


(Rs mn)

Opex Opex / Average loan assets


14/32


12

Key risks

Regulatory changes may affect the business model

As in the case of banks, RBI regulations have significant impact on the business models of

NBFCs too. Any adverse regulation or tightening of norms does affect the profitability and the

viability of NBFCs business models.

E.g. RBIs recent regulations discourage bilateral assignment transactions. Such transactions

account for a major portion of Indias securitisation transactions. As a result, NBFCs such as

Magma may have to undertake the SPV route for securitisation which will increase their costs.

NBFCs inability to pass on additional costs may adversely affect fund raising through the

securitisation route and may result in frequent equity dilutions. Any change in the

securitisation market would, thus, be a key monitorable.

Competitive market

CRISIL Research believes the rural financing market is competitive due to the presence of a

large number of players such as public and private banks, NBFCs and traditional financing

sources. Magma faces competition from select market players as these players have some

inherent advantages. The competition from these players may put pressure on Magmas

NIMs.

Table 5: Analysis of key competitors and their competitive advantages

NBFC Competitive advantages & disadvantages

Public sector banks Access to low-cost funds and high penetration in rural markets are thekey advantages. However, NBFCs such as Magma score over themdue to faster processing time and better quality of service

Private sector banks Access to low-cost funds is a key advantage, but branch penetration inrural areas is low

NBFCs Most of the NBFCs competing with Magma have strong support fromparent companies which puts Magma at a considerable disadvantage

Mahindra Finance Services receives support from Mahindra Group,Bajaj Finance from Bajaj Group, Cholamandalam from MurugappaGroup and Sundaram from TVS Group. Moreover, these NBFCs havea captive client base due to their respective automobile manufacturinggroup companies. Shriram Transport Finance has an establishedpresence in the used-CV market. Shriram City Union leverages thebranch network of Shriram Chit Fund

Exposed to cyclicality in the automobile industry

The automobile industry is susceptible to economic cycles, changes in interest rates and

varying demand patterns. Any change in demand patterns will adversely affect the demand for

financing and may have an adverse effect on the company. However, Magma is better placed

to handle the cyclicality in the industry due to product and geographical diversification.


15/32


F U N C T I

O N

B E T

T E R


13

Financial OutlookTotal income to grow at 47% CAGR over FY12-14CRISIL Research expects Magmas operating income to increase to Rs 9,453 mn at 47%

CAGR over FY12-14 driven by 30% growth in loan book and increase in average yields.

Increased contribution from high-yield products is expected to increase average yields to

16.7% in FY14 from 15.1% in FY12.

While we expect interest rates to remain high in FY13, a gradual decline in rates FY14

onwards will boost Magmas NIMs. The expected decline in interest rates will have no impact

on Magmas existing loans as its loans are on a fixed rate basis. Hence, the average portfolio

yield will not be substantially affected over the next two years due to a decline in interest

rates.

Figure 18: Total operating income & growth Figure 19: NIMs expected to expand


Accounting policy change impacted FY12 financialsIn FY12, Magma changed its accounting policy for booking of securitisation income. Earlier, it

used to book the income from securitisation of assets upfront but now it will amortise the

same over the life of the loan asset. The current accounting policy is more conservative and is

in line with the recent RBI guidelines on securitisation. With the change in accounting policy,

NIM declined to 5.5% in FY12 (from 8.9% in FY11), which reduced the net profit by 57% in

FY12.

Moreover, the company will reduce its dependence on securitisation (as a funding tool) and

grow its loan book. The recent equity infusion by private equity investors has helped Magma

reduce its dependence on securitisation. However, it plans to continue to use securitisation as

a treasury tool to meet short-term funding requirements if the yields are attractive.

3,980 5,217 4,376 6,990 9,453

16%

31%

-16%

60%

35%

-40%

-20%

0%

20%

40%

60%

80%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000


(Rs mn)

Operating income Growth (RHS)

18.0%16.6%

15.1%16.3% 16.7%

10.5%

8.5%

11.6% 11.6% 11.4%

8.3% 8.9% 5.5%6.5% 6.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%


Yields Cost of funds NIMS


16/32


14

Figure 20: Mix of on-book and off-book loan assets Figure 21: Break-down of total income


Asset quality expected to deteriorate

Magma has maintained good asset quality over the past five years. However, we believe that

the asset quality will deteriorate over the next two years owing to a) a weak economic

environment, b) fast growth in high-risk assets such as tractors and used CVs, and c)

seasoning of loan book.

Figure 22: Write-offs expected to increase


Net profit to increase at 67% CAGR over FY12-14

While we expect 47% CAGR for Magmas operating income over FY12-14, we believe

operating leverage will kick-in due to which operating costs will have a much slower 33%

CAGR over FY12-14. We believe the current organisational structure/size is adequate to grow

the loan book without a proportional cost increase. So we expect net profit to increase to

Rs 2,067 mn at a faster 67% CAGR over FY12-14. The return on assets is expected to

improve to 1.6% in FY14 from 1.1% in FY12 due to increase in yields and operating leverage.

30%41% 46%

57%64% 66%

70%59% 54%

43%36% 34%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY09 FY10 FY11 FY12 FY13E FY14E

On-book loan assets Off-book loan assets

63% 69%73%

93% 91% 92%

25%20%

21%

2% 5% 5%12% 11%7%

5% 3% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


I nt erest o n loan as set s Sec urit is at ion inc om e Ot her incom e

408 241 243 473 922

0.5%

0.3%

0.2%

0.3%

0.5%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

-

100

200

300

400

500

600

700

800

9001,000


(Rs mn)

Write offs as % of AUM (RHS)


17/32


F U N C T I

O N

B E T

T E R


15

Figure 23: Growth in net profit Figure 24: RoA and RoE to increase


Recent equity raising has boosted capital adequacyMagma has raised Rs 4.9 bn equity in FY12 through private placement to International

Finance Corporation Ltd and Zend Mauritius VC Investments Ltd (investment vehicle of

Kohlberg Kravis Roberts ) and conversion of warrants issued to the promoters. The strategic

intent of reducing securitisation and increasing the on-book loans assets will be supported

through equity infusion. The reported capital adequacy of the company has increased to 20%

which is comfortably above the regulatory requirement of 15%.

Table 6: Equity issuances in FY12Issued to Method Issued date Shares issued mn Issue price Rs Equity raised Rs mn

International Finance Corporation Ltd Private placement June 30, 2011 23.0 88 2,024

Zend Mauritius VC Investments Ltd Private placement June 30, 2011 26.9 88 2,367

Promoters Conversion of warrants October 28, 2011 10.0 50 500

Total 59.9 4,891


701 1, 201 740 1,441 2,067

77% 71%

-38%

95%

43%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%120%

-

500

1,000

1,500

2,000

2,500


(Rs mn)

PAT Growth (RHS)

1.3% 1.8%2.3%

1.1% 1.5% 1.6%

10.0%

16.1%

20.2%

7.9%

11.7%

15.1%

0%

5%

10%

15%

20%

25%

FY09 FY10 FY11 FY12E FY13E FY14E

RoA RoE


18/32


16

Figure 25: Adjusted capital adequacy ratio*

* We have reduced 30% of credit enhancements given on off-book assets from the Tier-Icapital. Hence, our adjusted capital adequacy does not match with those reported by thecompany


7.6%6.4%

8.4%

12.5%10.4%

9.2%

5.7%5.8%

7.4%

7.1%

6.6%6.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%


Tier I Tier II

12.2%13.3%

15.8%

19.6%

17.0%

15.5%


19/32


F U N C T I

O N

B E T

T E R


17

Q1FY13 Results AnalysisMagmas disbursements grew by 44.7% y-o-y (down 18% q-o-q due to seasonality) to

Rs 21 bn driven by strong growth across all products except CV loans which witnessed 9.4%

y-o-y growth. Loan assets increased 5.7% q-o-q (28.8% y-o-y) to Rs 127 bn.

The average yield on assets increased by 25 bps q-o-q to 15.4% due to increase in the share

of earning loan assets in the loan book from 82% in Q4FY12 to 86% in Q1FY13. (Earning

assets are loan assets excluding off-book assets on which income was booked upfront under

the previous accounting policy.) The share of high-yield assets (tractors/used CVs/SME loans)

in the loan book increased from 20% in Q4FY12 to 22% in Q1FY13, which also supported the

portfolio yields. The average borrowing costs declined by 60 bps q-o-q to 11.0% in Q1FY13.

Net interest income increased by 18.1% q-o-q (53.9% y-o-y) to Rs 1,399 mn driven by loanbook growth and expansion in NIMs. Other income increased by 195% q-o-q (183.8% y-o-y)

due to the one-time market entry fee income of Rs 139.5 mn received from insurance JV

partner (HDI-Gerling Industrie Versicherung AG) for providing support in launching the

general insurance business in India.

Operating costs increased by 6.3% q-o-q (50.7% y-o-y). The opex to average assets ratio

increased by 3 bps q-o-q (46 bps y-o-y) to 4.7%. The management has indicated higher costs

are on account of manpower and infrastructure build-up to support the new product launches

and future growth.

Asset quality deteriorated due to increased stress on tractor and CV loans. Write-offs as a

percentage of loan assets increased to 0.35% in Q1FY13 as against 0.2% in FY12. The

reported profit after minority interest increased 30.3% q-o-q (89.5% y-o-y) to Rs 330 mn.

Table 7: Q1FY13 consolidated results(Rs mn) Q1FY13 Q4FY12 Q1FY12 q-o-q (%) y-o-y (%)Net interest income 1,399 1,185 910 18.1 53.9Other income 266 90 94 195.3 183.8Total operating income 1,666 1,275 1,003 30.6 66.0Operating expenses 904 851 600 6.3 50.7

Staff costs 476 403 386 18.0 23.4Brokerage expenses 179 123 74 45.9 141.6Other operating expenses 249 325 140 -23.3 77.6

Pre-provision profit (PPP) 762 424 403 79.5 88.8Provision & contingency 154 44 85 254.5 82.1Profit before depreciation and tax 607 381 319 59.5 90.6Depreciation on fixed assets 123 105 65 16.4 89.1PBT 485 275 254 76.0 91.0Provision for tax 154 21 82 652 87.2Reported profit 330 255 171 29.6 92.8Minority interest 20 17 7 19.4 163.7PAT after minority interest 310 238 164 30.3 89.5No of equity shares (mn) 190 190 180 0.0 5.6Adj EPS (Rs) 1.6 1.3 0.9 30.3 79.4



20/32


18

Management Overview

CRISIL's fundamental grading methodology includes a broad assessment of management

quality, apart from other key factors such as industry and business prospects, and financial

performance.

Experienced management

The promoters, Mr Mayank Poddar (Executive Chairman) and Mr Sanjay Chamria (Vice-

Chairman and Managing Director), are well experienced in areas of finance and real estate.

The promoters are supported by a professional management team. Each business function,

such as finance, human resources, finance, sales, and credit, is looked after by separate

heads who have more than 20 years of experience in their respective areas.

Effective use of IT for management of receivables

Since the company caters to customers and regions with low access to banking channels,

receivables are collected in cash. The management has implemented an effective IT

infrastructure for collection management. Field officers have been provided with handheld

devices so that they can issue instant receipt of payments and also upload the collection data

on central servers. This has helped the company record its cash collections on almost a real

time basis. Our channel checks indicate that few other NBFCs have such a system in place.

The company has also tied up with the State Bank of India to receive the cash collected by

field officers and maintain daily MIS of collections.

Shift to conservative accounting policy positive

The company has changed its accounting policy for recognition of income on securitisation.

The current policy is more conservative as it amortises income over the life of the securitised

loan asset. The shift towards conservative accounting policy is a positive.


21/32


F U N C T I

O N

B E T

T E R


19

Corporate GovernanceCRISILs fundamental grading methodology includes a broad assessment of corporate

governance and management quality, apart from other key factors such as industry and

business prospects, and financial performance. In this context, CRISIL Research analyses the

shareholding structure, board composition, typical board processes, disclosure standards and

related-party transactions. Any qualifications by regulators or auditors also serve as useful

inputs while assessing a companys corporate governance.

Overall, corporate governance at Magma meets the statutory requirement supported by

reasonably good board practices and involvement of an independent board.

Board compositionMagmas board comprises eight members, of whom five are independent directors; this meets

the requirement under Clause 49 of SEBIs listing guidelines. The board has diverse

experience in areas of finance, automobile industry, law and audit. The independent directors

are vastly experienced in their respective fields and given their profile will be able to exercise

independence in decision making.

The board also consists of non-executive director (Mr Sanjay Nayar) nominated by one of the

companys larger shareholders (Kohlberg Kravis Roberts & Co., KKR). Mr Nayar is CEO and

country head of KKR and is well experienced in financial matters.

Boards processesThe company has - audit, remuneration & nomination, and investor grievance committees - in

place to support corporate governance practices. The audit committee is chaired by an

independent director, Mr Seshadri, who is a chartered accountant and has been formerly

associated with KPMG and Arthur Anderson.

The company has also formed a management committee, fair practices committee, an asset-

liability committee and a risk management committee. The management committee

formulates and reviews policies for long range expansion/diversification plans and consists of

the two promoters along with one independent director.

The companys quality of disclosure can be considered good judged by the level of

information and details furnished in the annual report, websites and other publicly available

data.


22/32


20

Valuation Grade: 5/5

CRISIL Research has used the P/B method to value Magma. We have assigned a P/B

multiple of 1.2x to FY14E adjusted book value of Rs 75 per share to arrive at fair value of

Rs 90 per share.

Magma has traded at median one-year forward multiple of 1.1x over FY03-FY12. Our

assigned multiple of 1.2x is higher than the median as we believe an increase in the

companys scale and the expected expansion in RoEs justify the expansion in multiple. The

assigned multiple is in line with the median multiples of retail finance NBFC peers.

One-year forward P/B band P/B movement

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

0

20

40

60

80

100

120

140

160

A p r - 0 3

S e p - 0

3

F e b - 0

4

J u l - 0 4

D e c - 0

4

M a y - 0

5

O c t - 0 5

M a r - 0 6

A u g - 0

6

J a n - 0

7

J u n - 0

7

N o v - 0

7

A p r - 0 8

S e p - 0

8

F e b - 0

9

J u l - 0 9

D e c - 0

9

M a y - 1

0

O c t - 1 0

M a r - 1 1

A u g - 1

1

J a n - 1

2

J u n - 1

2

(Rs)

Magma 0.7x 1.1x 1.5x 2.0x

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

M a r - 0 3

A u g - 0

3

J a n - 0

4

J u n - 0

4

N o v - 0

4

A p r - 0 5

S e p - 0

5

F e b - 0

6

J u l - 0 6

D e c - 0

6

M a y - 0

7

O c t - 0 7

M a r - 0 8

A u g - 0

8

J a n - 0

9

J u n - 0

9

N o v - 0

9

A p r - 1 0

S e p - 1

0

F e b - 1

1

J u l - 1 1

D e c - 1

1

M a y - 1

2

(Times)

1yr Fwd P/B (x) Median P/B

+1 std dev

-1 std dev


23/32


F U N C T I

O N

B E T

T E R


21

Peer comparison*

Companies

M.cap P/B RoA (%) RoE (%)

(Rs bn) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14EMagma Fincorp CRISIL ResearchEstimates 13 1.2 1.0 0.9 1.1 1.5 1.6 7.9 11.7 15.1

Industry Estimates

Magma Fincorp 13 1.2 1.0 0.9 1.0 1.6 1.6 7.3 14.4 16.3

Cholamandalam Investment 25 1.8 1.8 1.5 1.5 1.7 1.9 13.7 18.1 20.6

Shriram Transport Finance 126 2.1 1.7 1.5 3.8 3.6 3.9 24.0 22.9 21.6

Shriram City Union 38 2.2 1.9 1.6 2.7 2.6 21.7 20.6

Bajaj Finance 40 2.0 1.6 1.3 3.8 3.4 3.4 24.0 21.0 20.0

Sundaram Finance 37 1.7 1.8 1.5 2.7 2.7 2.7 23.1 20.5 20.4

Mahindra Finance 70 2.3 2.0 1.7 3.9 3.6 3.5 23.1 21.8 21.9

SE Investments 13 2.9 2.5 5.7 5.4 18.7 18.2

Consumer Finance 2.0 1.8 1.5 3.2 3.1 3.1 23.1 20.8 20.5

Muthoot Finance 52 1.3 1.1 4.8 3.5 3.4 41.9 27.3 23.7

Manapuram Finance 28 7.0 1.0 0.8 6.2 4.0 4.2 28.4 19.4 19.7

Gold Finance 7.0 1.2 1.0 5.5 3.8 3.8 35.1 23.4 21.7Power Finance Corporation 244 1.2 1.2 1.1 2.5 2.4 2.4 17.0 16.6 16.0

IDFC 209 1.7 1.5 1.4 2.8 2.8 2.8 13.3 13.6 14.6

SREI Infrastructure Finance 12 0.4 0.4 NA 0.7 0.6 0.7 3.6 3.4 4.5

PTC India Financial services 8 0.6 0.6 8.4 7.3 3.2 14.1 13.4 7.5

Infrastructure Finance 1.2 0.9 1.0 2.7 2.6 2.6 13.7 13.5 11.1

HDFC 1,011 4.1 3.8 3.3 2.8 2.6 2.7 24.0 23.3 23.3LIC Housing Finance 135 2.4 2.0 1.7 1.6 1.8 1.9 18.6 21.1 22.6

Dewan Housing Finance 20 1.0 0.8 0.7 1.3 1.5 1.5 18.1 20.0 20.5

Gruh Finance 29 7.2 6.1 5.0 3.1 3.2 3.3 34.2 35.7 39.3

Housing Finance 3.2 2.9 2.5 2.2 2.2 2.3 21.3 22.2 22.9SBI 1,495 1.4 1.3 1.1 0.9 0.9 1.0 16.2 16.7 16.9

Punjab National Bank 290 1.0 1.0 0.9 1.2 1.1 1.1 19.4 20.0 20.0

Canara Bank 190 0.8 0.8 0.7 0.9 1.0 1.0 15.4 18.2 16.8

Oriental Bank 75 0.6 0.6 0.6 0.7 0.8 0.8 9.9 12.8 14.1

Dena Bank 36 0.8 0.7 0.6 1.0 0.9 0.9 19.7 18.7 18.5

PSU Banks 0.8 0.8 0.7 0.9 0.9 1.0 16.2 18.2 16.9ICICI Bank 1,075 1.7 1.6 1.5 1.3 1.5 1.4 13.1 13.6 13.8

Axis Bank 438 1.9 1.6 1.4 1.6 1.6 1.6 20.3 20.5 19.6

HDFC Bank 1,384 4.5 3.9 3.3 1.7 1.7 1.8 18.8 20.4 21.9

Yes Bank 126 2.7 2.1 1.8 1.5 1.5 1.5 23.1 22.0 21.5

Private Banks 13 2.3 1.8 1.6 1.5 1.5 1.5 19.6 20.4 20.6

Source: CRISIL Research, Industry *as on July 13, 2012


24/32


22

Company Overview

Incorporated in 1988, Magma Fincorp Ltd (Magma) is a Kolkata-based NBFC. Magma caters

to financing needs of rural and semi-rural regions in India, largely vehicle financing. The

company finances new and used commercial vehicles, passenger cars, utility vehicles,

construction equipment, tractors (retail financing) as well as provides loans to small and

medium enterprises (SMEs). It has recently launched gold loan financing and plans to launch

new products such as insurance and affordable-housing loans.

Product-wise AUM break-up State-wise AUM break-up


Pan-India presence

Magma has a pan-India presence with 200 branches in 21 states covering over 2,800

business clusters. Nearly 81% of its branches are located in rural and semi-rural regions.

Geographically distributed branch network... ... predominantly in rural areas

Source: Compan, CRISIL Research Source: Company, CRISIL Research

Cars & MUVs27%

CVs34% ConstructionEquipment

19%

Used CVs5%

SME Loans5%

Tractors10%

UP, 6%

Bihar, 3%

Jharkhand,

4%

Orissa, 5%

West Bengal,6%

Chattisgarh,4%

Gujarat, 7%

MP, 6%

Maharashtra,12% AP, 12%

Karnataka,4%

Kerala, 5%

Tamil Nadu,3%

Delhi, 5%

Haryana, 5%

HP, 1%

Punjab, 4%

Rajasthan,7%

Uttarakhand,1%

South23%

East22%

West25%

North30%

Rural44%

Urban19%

Semi-rural37%


25/32


F U N C T I

O N

B E T

T E R


23

Subsidiaries & associatesName of entity Type Magmas stake Other shareholders

Magma ITL Finance Ltd Subsidiary 74% International Tractors Ltd

Magma HDI General Insurance Co. Ltd Associate 37% Promoters, HDI-Gerling, Germany

Source: Company

Unique organisation structureMagma revamped its organisation structure in FY08 through creation of different verticals

based on functions, e.g. credit & risk, receivables management, operations, treasury and

finance, etc. Each functional vertical is headed by a separate leader. This organisation

structure is different from most other NBFCs who follow a branch/SBU-wise reporting

structure. We believe the unique organisation structure has helped the company focus on

each aspect of the business. However, the structure has also increased the operational costs

of the company to one of the highest in the industry.

Organisational structure of Magma

Source: Company

Internal AuditBoard of Directors

Managing Director

Acco unts

MIS

Secretariat

Taxation

Chi ef strategy officer Chi ef Receivables

Head

National HeadColl ection & verification

Nation al Head(61-180 days bucket)

National Head(180+ days bucket)

Legal Head

SME & ARD Ceasedand sold

National Head(0 day bucket)

Chi ef operating officer

National Head-Sales

Nation al Head - Credit

National Head -Operations

National Head - Admin istration

Chi ef finance officer

Treasury

Investor Relations

HR Head

IT Head

Business Head Gold Loan

CEO - Insurancedivision


26/32


24

Key Milestones

1988 Year of incorporation

1989 Started financing business

1992 Merger with ARM Group Enterprises

1996 Started retail financing in eastern India

2001 Acquired Consortium Finance Ltd to expand network in North India

2007 Merged with Shrachi Infrastructure Finance Ltd to expand network in west and south India.

Merger entity renamed as Magma Shrachi Finance Ltd

2008 Name changed to Magma Fincorp

Entered joint venture with ITL for tractor business financing

2010 Entered joint venture with HDI-Gerling to foray into general insurance business

2011 Capital infusion of Rs 1,220 mn by qualified institutional buyers

2012 Capital infusion of Rs 4,390 mn by private equity investors


27/32


F U N C T I

O N

B E T

T E R


25

Annexure: Consolidated Financials*

Note: FY12 financials are not strictly comparable with that of the previous years due to thenew format of disclosure under Schedule VI of the Companies ActSource: CRISIL Research

(Rs mn) FY10 FY11 FY12 FY13E FY14E (Rs mn) FY10 FY11 FY12 FY13E FY14ENet Interest Income 3,315 4,667 3,842 6,458 8,895 Spread AnalysisNon Interest Income 665 550 533 533 558 Yield on AUM 18.0% 16.6% 15.1% 16.3% 16.7%Total Operating Income 3,980 5,217 4,376 6,990 9,453 Cost of borrow ings 10.5% 8.5% 11.6% 11.6% 11.4%Operating Expenses 2,143 2,761 2,735 3,820 4,817 Net Interest Margin (NIM) 8.3% 8.9% 5.5% 6.5% 6.7%Staff Costs 1,053 1,363 1,490 2,173 2,777 Return RatiosOther Operating Expenses 1,090 1,397 1,245 1,647 2,040 ROA (%) 1.8% 2.3% 1.1% 1.5% 1.6%Pre- provision profit (PPP) 1,837 2,456 1,641 3,170 4,636 ROE (%) 16.1% 20.2% 7.9% 11.7% 15.1%Provision & Contingency 404 356 307 553 1,010 Growth ratiosProfit before depreciation and tax 1,433 2,101 1,333 2,617 3,626 Assets under Management (AUM) 15.4% 14.2% 29.0% 31.1% 29.8% Depreciation On Fixed Assets 328 279 296 322 357 Disbursements 17.0% 33.2% 36.7% 33.8% 30.6%PBT 1,105 1,822 1,037 2,296 3,269 Net Interest Income 15.7% 40.8% -17.7% 68.1% 37.8%Provision for tax 392 601 259 780 1,111 Non Interest Income 17.8% -17.3% -3.0% -0.1% 4.7%PAT 713 1,221 778 1,515 2,158 Total Operating Income 16.0% 31.1% -16.1% 59.8% 35.2%Minority Interest 13 20 38 75 91 Operating Expenses 4.0% 28.8% -0.9% 39.7% 26.1%PAT after Minority Interest 701 1,201 740 1,441 2,067 Staff Costs 5.4% 29.4% 9.3% 45.8% 27.8%

Pre- provision profit (PPP) 34.0% 33.7% -33.2% 93.2% 46.3%Balancesheet Provision & Contingency -3.3% -12.0% -13.6% 79.8% 82.7%(Rs mn) FY10 FY11 FY12 FY13E FY14E Adjusted Net Profit 79.2% 71.3% -36.3% 94.7% 42.4%Total Share Capital 1,593 1,853 1,806 1,629 1,152 EPS (Rs) 76.8% 43.9% -57.9% 94.6% 43.5%Equity share capital 218 260 379 379 379 Book Value (Rs) 19.7% 26.3% 17.4% 8.9% 10.8%Equity Share w arrants - 125 - - - Asse t QualityPreference capital 1,375 1,469 1,427 1,249 772 Write off as % of AUM 0.5% 0.3% 0.2% 0.3% 0.5%Reserves 3,224 5,396 10,637 11,918 13,852 Net NPA (%) 0.0% 0.0% 0.0% 0.0% 0.0%Shareholders Funds 4,817 7,250 12,443 13,547 15,004 Valuation DataMinority Interest 52 98 188 235 295 P/E (x) 10.3 7.2 17.0 8.7 6.1 Borrow ings 36,561 46,361 61,167 95,786 129,369 P/ABV (x) 2.1 1.5 1.1 1.0 0.9 Other Liabilities & Provisions 4,640 4,760 7,848 5,848 6,714 Key ParametersDeferred tax liability 479 381 234 234 234 Loan asse ts - inc lud ing off-book (Rs mn) 81,723 93,367 120,400 157 ,793 204 ,824Sources of funds 46,549 58,850 81,880 115,650 151,615 Disbursements (Rs mn) 40,647 54,148 74,040 99,054 129,414

Capitalisation ratios (Adjuste d)Cash & Bank Balances 9,709 10,075 8,101 9,005 8,992 Capital adequacy ratio 12.2% 15.8% 19.6% 17.0% 15.5%

Investments 191 114 - - - Tier I capital ratio 6.4% 8.4% 12.5% 10.4% 9.2%Net Loans and advances 34,234 46,358 70,461 102,400 137,556 Tier II capital ratio 5.8% 7.4% 7.1% 6.6% 6.3%Net Fix ed Assets and Capit al WIP 1,476 1,425 1,341 1,537 1,703 Efficiency ratioDeferred tax asset - - - - - Cost to Income ratio 62.1% 58.3% 69.3% 59.3% 54.7%Other Assets 939 877 1,983 2,708 3,363 Opex/ average assets 6.2% 5.8% 4.3% 4.2% 3.9%Application of funds 46,549 58,850 81,880 115,650 151,615 Leverage (x) 7.6 6.4 4.9 7.1 8.6

(Rs mn) Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13FY10 FY11 FY12 FY13E FY14E Total operating income 1003 1073 1024 1275 1666

Adj EPS (Rs) 6.4 9.3 3.9 7.6 10.9 Change (q-o-q) -47% 7% -5% 25% 31% Adj Book Value (Rs) 31.6 44.5 58.1 64.8 75.0 PAT 164 206 132 238 310Dividend per share (Rs) 0.5 0.6 0.6 0.6 0.6 Change (q-o-q) -72% 26% -36% 80% 30%

Actual o/s shares 108.9 129.8 189.7 189.7 189.7 EPS 0.9 1.1 0.7 1.3 1.6

Income Statement

Per shareQuarterly Financials

Ratios


28/32


26

Focus Charts

Product mix Total income and growth


Disbursement growth Yields, cost of funds and NIMs


Adjusted Capital adequacy Share price movement

-Indexed to 100


Cars & MUVs30%

CVs28%

ConstructionEquipment

18%

Used CVs7%

SME Loans6%

Tractors11%

3,980 5,217 4,376 6,990 9,453

16%

31%

-16%

60%

35%

-40%

-20%

0%

20%

40%

60%

80%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000


(Rs mn)

Operating income Growth (RHS)

25 35 3 5 41 54 74 99 129

38%

-1%

17%

33%37%

34%31%

-15%

-5%

5%

15%

25%

35%

45%

-

20

40

60

80

100

120

140

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3 E

F Y 1 4 E

(Rs bn)


18.0%16.6%

15.1%16.3% 16.7%

10.5%

8.5%

11.6% 11.6% 11.4%

8.3% 8.9% 5.5%6.5% 6.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%


Yields Cost of funds NIMS

7.6% 6.4%8.4%

12.5%10.4% 9.2%

5.7%5.8%

7.4%

7.1%

6.6%6.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%


Tier I Tier II

12.2%

13.3%

15.8%

19.6%

17.0%

15.5%

-

20

40

60

80

100

120

J u l - 1 1

A u g - 1

1

A u g - 1

1

S e p - 1

1

O c t - 1 1

O c t - 1 1

N o v - 1

1

D e c - 1

1

D e c - 1

1

J a n - 1

2

F e b - 1

2

M a r - 1 2

M a r - 1 2

A p r - 1 2

M a y - 1

2

M a y - 1

2

J u n - 1

2

J u l - 1 2

Magma NIFTY


29/32


F U N C T I

O N B

E T T E

R

YEARS

This page is intentionally l eft blank


30/32


CRISIL Research Team

President

Mukesh Agarwal CRISIL Research +91 22 3342 3035 [email protected]

Analytical Contacts

Tarun Bhatia Senior Director, Capital Markets +91 22 3342 3226 t [email protected]

Prasad Koparkar Senior Director, Industry & Customised Research +91 22 3342 3137 [email protected]

Binaifer Jehani Director, Customised Research +91 22 3342 4091 [email protected]

Manoj Mohta Director, Customised Research +91 22 3342 3554 [email protected]

Sudhir Nair Director, Customised Research +91 22 3342 3526 [email protected]

Mohit Modi Director, Equity Research +91 22 4254 2860 [email protected]

Jiju Vidyadharan Director, Funds & Fixed Income Research +91 22 3342 8091 [email protected]

Ajay D'Souza Director, Industry Research +91 22 3342 3567 [email protected]

Ajay Srinivasan Director, Industry Research +91 22 3342 3530 [email protected]

Rahul Prithiani Director, Industry Research +91 22 3342 3574 [email protected]

Business Development

Siddharth Arora Director, Customised Research +91 22 3342 4133 [email protected]

Vinaya Dongre Director, Industry & Customised Research +91 22 3342 8025 [email protected]

Sagar Sawarkar Associate Director, Equity Research +91 22 3342 8012 [email protected]

Deepak Mittal Associate Director, Funds & Fixed Income Research +91 22 3342 8031 [email protected]

Prosenjit Ghosh Associate Director, Industry & Customised Research +91 22 3342 8008 [email protected]

Business Development Equity Research

Ahmedabad / Mumbai

Vishal Shah Regional Manager, Business DevelopmentEmail : [email protected] I Phone : 9820598908

Bengaluru / Mumbai

Shweta Adukia Regional Manager, Business DevelopmentEmail : [email protected] I Phone : 9987855771

Chennai / Hyderabad

Urmil Shah Regional Manager, Business DevelopmentEmail : [email protected] I Phone : 9819916595

Delhi

Arjun Gopalkrishnan Regional Manager, Business DevelopmentEmail : [email protected] I Phone : 9833364422

Kolkata

Priyanka Murarka Regional Manager, Business DevelopmentEmail : [email protected] I Phone : 9903060685


31/32


F U N C T I

O N

B E T T E

R

YEARS

Our Capabilities

Making Markets Function Better

Economy and Industry Research Largest team of economy and industry research analysts in India Coverage on 70 industries and 139 sub-sectors; provide growth forecasts, profitability analysis, emerging trends,

expected investments, industry structure and regulatory frameworks 90 per cent of Indias commercial banks use our industry research for credit decisions Special coverage on key growth sectors including real estate, infrastructure, logistics, and financial services

Inputs to Indias leading corporates in market sizing, demand forecasting, and project feasibility Published the first India-focused report on Ultra High Net-worth Individuals All opinions and forecasts reviewed by a highly qualified panel with over 200 years of cumulative experience

Funds and Fixed Income Research Largest and most comprehensive database on Indias debt market, covering more than 14,000 securities Largest provider of fixed income valuations in India Value more than Rs.33 trillion (USD 650 billion) of Indian debt securities, comprising 85 per cent of outstanding

securities Sole provider of fixed income and hybrid indices to mutual funds and insurance companies; we maintain 12

standard indices and over 80 customised indices Ranking of Indian mutual fund schemes covering 71 per cent of average assets under management and Rs 4.7

trillion (USD 94 billion) by value Retained by Indias Employees Provident Fund Organisation, the worlds largest retirement scheme covering

over 50 million individuals, for selecting fund managers and monitoring their performance

Equity and Company Research Largest independent equity research house in India, focusing on small and mid-cap companies; coverage

exceeds 100 companies Released company reports on all 1,401 companies listed and traded on the National Stock Exchange; a global

first for any stock exchange First research house to release exchange-commissioned equity research reports in India Assigned the first IPO grade in India


32/32

Our OfficeAhmedabad706, Venus AtlantisNr. Reliance Petrol PumpPrahladnagar, Ahmedabad, IndiaPhone: +91 79 4024 4500Fax: +91 79 2755 9863

Hyderabad3rd Floor, Uma ChambersPlot No. 9&10, Nagarjuna Hills,(Near Punjagutta Cross Road)Hyderabad - 500 482, IndiaPhone: +91 40 2335 8103/05Fax: +91 40 2335 7507

BengaluruW-101, Sunrise Chambers,

22, Ulsoor Road,Bengaluru - 560 042, IndiaPhone:+91 80 2558 0899

+91 80 2559 4802Fax: +91 80 2559 4801

KolkataHorizon, Block 'B', 4th Floor

57 Chowringhee RoadKolkata - 700 071, IndiaPhone: +91 33 2289 1949/50Fax: +91 33 2283 0597

ChennaiThapar House,43/44, Montieth Road, Egmore,Chennai - 600 008, IndiaPhone:+91 44 2854 6205/06

+91 44 2854 6093Fax: +91 44 2854 7531

Pune1187/17, Ghole Road,Shivaji Nagar,Pune - 411 005, IndiaPhone: +91 20 2553 9064/67Fax: +91 20 4018 1930

GurgaonPlot No. 46Sector 44Opp. PF OfficeGurgaon - 122 003, IndiaPhone: + 91 124 6722 000

CRISIL LimitedCRISIL House, Central Avenue,

Hiranandani Business Park, Powai, Mumbai 400076. IndiaPhone: +91 22 3342 3000 | Fax: +91 22 3342 8088

Documents

CRISIL Research Report Magma Fincorp 2012