Magma Fincorp - initiating coverage-Jul-13-EDEL Magma, over the years, has built a diversified,...

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Edelweiss Securities Limited

Magma Fincorp (Magma) strengthened itself by strategically diluting its

auto loan focus (down to <70% from 95% in FY09) and building a diversified

and scalable business model. Accounting changes induced earnings

volatility is now a thing of the past. The company is geared to graduate to

the next level—improve RoA trajectory to 1.3% (for standalone entity on

earning assets including assignment) and RoEs to >15%—led by NIM

expansion (particularly yield enhancement). Improving and sustainable risk

adjusted return profile can re-rate the stock to 1.4x FY15 consolidated

book. We initiate coverage with ‘BUY’ and TP of INR133 (47% upside).

Multiple levers to boost RoEs to >15% by FY15E

Magma’s RoE profile was weak in FY12/13 (at (<10%) due to regulatory/accounting

changes pertaining to off-balance transactions. The company, however, reduced

reliance on such transactions from as high as 70% (FY06-09) to ~32% in FY13, which led

to sharp dip in NIMs below 4%. The strategy to normalise RoEs to >15% will be led by

NIM improvement. Currently, it has multiple levers at hand to improve yields: (i) rising

share of high yield products (mortgages, gold loans, tractors, used CV); (ii) unamortised

securitisation income; and (iii) run-down of loans originated in FY11 at lower yields.

Productivity ratios to improve as businesses gain scale

Common infrastructure, branch network and customer segment provides enough

scope for productivity improvement (AUM/employee at INR20mn is 20-30% lower than

peers) led by scale up of newly launched businesses. While Magma’s opex/AUMs at

3.3% is at par with peers, cost-to-income appears high at 65% due to weak income

profile. NIM improvement to 5.8% will cut the ratio to 53%. Though credit cost

(<50bps) is best in class, we are building in higher credit cost of 120bps in FY15E

anticipating increase in provisioning coverage to 50% and overall system-wide stress.

Outlook and valuations: Re-rating on cards; initiate with ‘BUY’

Magma, over the years, has built a diversified, scalable and profitable business model.

Down playing the company’s inherent business strength, the Street values the stock at

<1x FY15E book (consolidated), a steep discount to peers, owing to weak RoE profile in

FY12/13. Improving/sustainable return profile (RoA/RoE of >1.3%/15%) can re-rate the

stock to 1.4x FY15E book, implying a TP of INR133. We initiate coverage with ‘BUY/SO’.

INITIATING COVERAGE

MAGMA FINCORP Return to normalcy

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Outperformer

Risk Rating Relative to Sector Medium

Sector Relative to Market Equalweight

MARKET DATA (R: MAGM.BO, B: MGMA IN)

CMP : INR 90

Target Price : INR 133

52-week range (INR) : 111 / 59

Share in issue (mn) : 190.0

M cap (INR bn/USD mn) : 17 / 280

Avg. Daily Vol.BSE/NSE(‘000) : 164.7

SHARE HOLDING PATTERN (%)

Current Q4FY13 Q3FY13

Promoters *

33.7 33.7 33.7

MF's, FI's & BK’s 12.2 12.5 13.6

FII's 43.7 43.5 42.3

Others 10.4 10.3 10.4

* Promoters pledged shares

(% of share in issue)

: 2.5

RELATIVE PERFORMANCE (%)

Sensex Stock

Stock over

Sensex

1 month (0.1) (2.4) (2.3)

3 months 5.7 16.3 10.6

12 months 11.3 43.7 32.4

Kunal Shah

+91 22 4040 7579

[email protected]

Click on image to view video

Nilesh Parikh

+91 22 4063 5470

[email protected]

Prakhar Agarwal

+91 22 6620 3076

[email protected]

India Equity Research| Banking and Financial Services

July 08, 2013

Consolidated financials

Year to March FY12 FY13 FY14E FY15E

PAT (INR mn) 740 1,391 2,118 2,889

Networth (INR mn) 11,015 13,974 15,695 18,117

Diluted EPS (INR) 3.9 7.3 11.2 15.2

Book value per share (INR) 58.1 73.6 82.6 95.4

Consol ROE (%) 6.9 9.7 13.0 16.0

P/E (Cons) (x) 23.1 12.3 8.1 5.9

Price/ BV (Cons) (x) 1.6 1.2 1.1 0.9

http://www.edelresearch.com/webcast/webcast_new.aspx?Id=23440&Type=ynaj9XvqmJoptbYzJzovtA==

Banking and Financial Services

2 Edelweiss Securities Limited

Investment Rationale

Magma is a well-diversified (both product-wise and geographically) rural/semi-rural focused

retail non-banking financial company (NBFC) with consolidated AUM of INR162bn. We like

the company for its differentiated approach and diversified business model:

1) Differentiated operating structure ensures scalable business model: Laterally aligned

sales, credit and operation functions has resulted in reduced turnaround time and

healthy portfolio performance. Key characteristics: (i) well defined origination; (ii)

system driven, decentralised but standardised appraisal system; and (iii) bucket-based

collection process. As the company utilises common infrastructure, branch network and

customer segment for all product verticals (except for gold loans) there is enough scope

for productivity improvement (AUM/employee at INR20mn is 20-30% lower than peers)

led by scale up of newly launched/acquired businesses.

2) Product diversification to augment growth potential: Magma is strategically

diversifying away from CV/CE focus—the proportion is now down to less than 40% from

as high as 70% over FY06-10. It is developing a balanced risk profile within its overall

product bouquet – while key growth drivers will be high yielding tractors and used CVs

(now offered only from 50-60% branches), scale up of recently launched collateralised

products including mortgages and gold loans will also boost growth momentum.

3) Regional diversification to reduce concentration risks: Balanced AUM distribution

across states and regions—no state contributes >11% to AUM. A well diversified

approach will help minimise regional, local and single product concentration risks.

4) Multiple levers to boost RoEs to >15%: Magma’s RoE profile was weak in FY12/13 at

(<10%) due to regulatory changes pertaining to off-balance transactions. The strategy

to normalise RoE to >15% will be led by NIM improvement (particularly yield

enhancement). It has multiple levers at hand to improve yield: (i) increasing proportion

of high yielding products (mortgages, gold loans, tractors, used CV); (ii) unamortised

securitisation income; and (iii) run-down of loans originated at lower yields in FY11.

Fig. 1: Structural levels in place to improve RoE

Source: Company

Business

model strength

Product diversification

(9 product lines)

-To augment growth potential

(AUMs to post 21% CAGR)

Regional diversification

-No state contributes >11%

of AUM

-Reduced concentration risk

Multiple levers to boost RoEs to >15%

-Margin improvement (particularly

yield enhancement)

-Improved productivity

Differentiated operational structure

Laterally aligned credit & operation

functions; Bucket-wise collection

-Reduces turnaround time

-Healthy portfolio performance

Laterally aligned sales, credit and

operation functions have reduced

turnaround time and improved

portfolio performance

Strategy to normalize RoEs to >15%

would be aided by NIM

improvement, particularly yield

enhancement

Magma Fincorp


Differentiated operational structure ensures scalable business model

Magma follows a differentiated laterally aligned operating structure, unlike other NBFCs,

which aids scalability, operating/cost efficiency and specialisation. The visible outcome of

this structure is reduced turnaround time to as low as 8-10 days and healthy asset quality.

Key characteristics of its operating structure include: (i) well defined origination; (ii) system

driven, decentralised, but standardised appraisal system; and (iii) bucket-based collection

process.

Fig. 2: Vertically aligned business model to aid scalability, cost efficiency and asset quality

Source: Company

Laterally aligned credit and operation functionality

Three critical functions, viz., sales (manned by 2,200 people), credit (350 member team) and

operations (500-600 members) are aligned laterally. Of the 231 asset finance centers (of

total 275 branches, 44 branches are gold loan branches and balance are asset finance

branches), sales and operations function from all locations, while credit facility is available

across 38 locations.

Sales manager initiates the loan proposal, which then goes to the collection function for

field investigation and operation function for documentation/CIBIL check. The report of

collection and operation function is forwarded to the credit division, which assesses the

customer’s credit profile (including cash flow analysis, income generating ability etc). The

entire process is system driven (in house Oracle based IT application) and typical turnaround

time is 8-10 days (from lead generation to payment). While field investigation takes place

within 48 hours, credit appraisal within 24 hours and one day for payment processing,

significant time is consumed by customers for document submission and evaluation.

Product-wise Verticals Collection Vertical Integrators

AFC HFC Gold Loans Insurance

0 dpd

1 - 60 dpd

61 - 180 dpd

ARD / LEGAL

SME

Based on Customer Behaviour Risk ManagementMarketing

Product-wise Functions

People ManagementStrategy

Technology Finance / Treasury

Sales

Product

Development

Credit Operations

Channel

Management

Key characteristics of its operating

structure include: well defined

origination; system driven,

decentralised, but standardised

appraisal system; and bucket-based

collection process



Fig. 3: Well defined origination with decentralised but Chart 1: …results in reduced turnaround time

standardised appraisal…

Source: Company

Bucket-based collection vertical

Magma’s collection vertical is currently manned by a 3,300-member team and a ‘bucket-

based collection’ process is followed. The sales executive who initiates the proposal is

responsible for delinquencies during the first year of the contract. In the bucket-based

structure, different delinquency buckets (0dpd, 1–30dpd, 31–90dpd, 91–180dpd, 181-

730dpd, beyond 730dpd) are managed by different teams; the intensity of the follow up

increases as a contract slips into higher delinquency bucket. The robust collection

mechanism has enabled Magma achieve robust collection efficiencies even in stressful times.

Sales Team Sourcing

Operations TeamCIBIL/ check/

Customer history

evolution

Collection Team Operations Team

Field investigation-

conducts soft

checks on customer

Risk control unit-

ensure proper

documentation

Credit TeamTele-verification,

appraisal

Sales TeamPast sanction

processing

Operation TeamPayment

processing

Head Office Audit

Agreement

Execution

The collection vertical is currently

manned by a 3,300-member team

and a ‘bucket-based collection’

process is followed

8

11

13

16

18

21

FY10 FY11 FY12 FY13

(Da

ys)

Turnaround time

Magma Fincorp


Chart 2: Collection efficiency managed well even during stressful times

Source: Company

A stringent provisioning policy: Accelerated adoption of RBI draft guidelines

Magma follows a stringent provisioning policy (compared to current RBI guidelines) and has

been prudent in moving towards RBI’s draft guidelines based on the Usha Thorat Committee,

limiting future impact.

Table 1: NPA recognition policy more stringent than RBI stipulated norms

Source: Company

Plagued by industry-wide stress in vehicle financing segment

The company too has been plagued by industry-wide stress in the vehicle financing segment

and GNPLs (based on 90-days past due) jumped from 1.8% in FY12 to 3.2% in FY13. However,

this is much below the run rate of 6.5% reported in FY10. We believe, 180-days’

delinquencies will be a more appropriate metric to evaluate considering Magma’s target

segment of under-served prime customers, self employed, first-time buyers where cash flow

streams tend to be more volatile—180-days’ GNPL has remained stable YoY in FY13 at 1%

(lower than 4.2% in FY10).

85.0

90.0

95.0

100.0

105.0

110.0

FY8 FY9 FY10 FY11 FY12 FY13

(%)

Collection efficiency

Delinquency past due Delinquency past due

Secured Unsecured Secured Unsecured

Standard 0 to 4 months 0.30% 0.30% 0 to 6 months 0.25% 0.25%

Sub-standard > 4 to 16 months 15% 25% > 6 to 24 months 10% 10%

Doubtful 1 >16 to 28 months 25% 100% > 24 to 36 months 20% 100%

Doubtful 2 >28 to 52 months 40% 100% > 36 to 60 months 30% 100%

Doubtful 3 > 52 months 100% 100% > 60 months 50% 100%

Loss 100% 100% 100% 100%

Magma's provisioning policy RBI's provisioning policy

180-days’ GNPL has been stable YoY

in FY13 at 1% (lower than 4.2% in

FY10)



Chart 3: While 180 days’ GNPL remained stable, 90 days GNPL saw an uptick (an industry-wide phenomenon)

Source: Crisil

While delinquencies (180dpd) have been managed below 1% in car, CE, CV and SME

segments, they have been ~2.5% for used CV and tractors. In the home loan and LAP

portfolio acquired from GE, delinquencies (90dpd) are much higher than industry standards

at 9.2% and 12.6%, respectively. This is mainly due to constant run-down in GE portfolio

over last 4-5 years without any growth. Magma’s ability to reduce this delinquency at par

with industry average either through recovery or significant scale up will be critical.

Chart 4: Product-wise 90 day dpd (as on FY13) Chart 5: Product-wise 180 dpd (as on FY13)

Source: Crisil

Building in higher credit cost factoring in increased provisioning coverage and some stress

Going forward, we expect credit cost to inch up from the current level owing to

management’s increased focus on higher yielding products which are relatively more risky.

We are building in credit cost of ~120bps in FY15E anticipating increase in provisioning

coverage to 50% (from 20% at present) and factoring in system-wide stress. Key

monitorable will be SME lending—while it has been the best performing segment till date

(having gone through three cycles), entirely unsecured nature poses risk to delinquency.

1.0

2.8

4.6

6.4

8.2

10.0

Mar-10 Mar-11 Mar-12 Mar-13

(%)

90+ dpd 90+ dpd(1 year lagged)

3.2

1.0

6.4

5.9

2.5

3.9

1.7

0 2 4 6 8

Overall

SME

Tractor

Used CV

CV

CE

Car

(%)

0.0

1.2

2.4

3.6

4.8

6.0

Mar-10 Mar-11 Mar-12 Mar-13

(%)

180 + dpd 180+ dpd(1 year lagged)

We are building in credit cost of

120bps in FY15E anticipating

increase in provisioning coverage to

50% and factoring in system-wide

stress; key monitorable will be

unsecured SME lending segment

1.0

0.5

2.4

2.5

0.6

1.0

0.6

0.0 1.0 2.0 3.0

Overall

SME

Tractor

Used CV

CV

CE

Car

(%)

In acquired mortgage portfolio

(from GE), delinquencies are much

higher than industry standards –

Magma’s ability to manage it will be

critical

Magma Fincorp


Chart 6: Higher credit cost estimated anticipating some stress and increase in provisioning coverage

Source: Company, Edelweiss research

Product diversification to augment growth potential

Magma is strategically moving away from CV/CE focus—down to <40% from as high as 70%

in FY06-10. Management’s intention over the past few years was to grow and establish its

brand in high yielding product segments viz., tractors, used CV and SME loans (proportion of

which has increased to ~23% from ~6% in FY09). Besides this, it has recently launched

collateralised products including home finance (by acquiring GE’s INR13.5bn home loan

portfolio) and introduced gold loans (offered from 44 branches). Currently, the company

offers a bouquet of nine products which augments its growth potential and cushions it from

single product concentration risks.

Table 2: Targets under-served primary customers, entry level vehicles, SRTO, first-time buyers

Source: Company

16.0

24.8

33.6

42.4

51.2

60.0

1.0

1.6

2.2

2.8

3.4

4.0

FY13 FY14E FY15E

(%)

(%)

Gross NPLs Net NPLs Prov cov

Products Key customer segments Focus areas to drive growthATS

(INR '000)

LTV

(%)

Tenure

(months)

Cars Entry level vehicles and UV/MUV Rural markets and UV/MUV segment 410 67 44

Small Road Transport Operator (SRTO) Tie up with car manufacturers

Commercial vehicles (CV) 1-5 vehicle owners (esp FTB segment) LCV & SCV 950 86 44

SRTO Tie up with CV manufacturers

Tractors Land owning farmers Alliances with OEMs 330 62 45

25-75 HP tractors New product introductions

Used CV FTB, small fleet drivers LCV 530 70 35

M&HCV, refinance High vintage vehicles (7-8 years)

Construction equipment Small scale enterprises (SSE), SME Increase collaboration with OEMS 2,100 79 39

Wider product range

SME loans SME segment MSME segment 2,440 N/A 31

Working capital, business expansion

Gold loans Primary borrowers Target underpenetrated urban 70 53 11

markets in North, West and East India

Home loans Affordable housing Tier 3 and 4 towns

General insurance Captive car and CV customers Penetrate motor insurance market

Rural agri based products Rural agri markets

Magma is strategically moving away

from CV/CE focus—proportion of

which is now down to less than 40%

from as high as 70% in FY06-10

0.0

0.4

0.8

1.2

1.6

2.0

FY10 FY11 FY12 FY13 FY14E FY15E

(%)

Credit cost as % of AUM



• As the company utilises common infrastructure, branch network and customer

segment for all product verticals (except for gold loans) there is enough scope for

scaling up these newly launched/acquired businesses. Overall AUM growth of 21% over

FY13-15E will be primarily led by mortgage and gold loan business.

o Experience gained from inherent asset finance business will provide added value to

appraisal/credit process for mortgages (particularly evaluating surrogate income of

self employed category). Pan India presence with network of >200 branches will

give a quick head start to this business scale up– mortgages will be offered from

50% branches in initial year and gradually extended to 100% branches in five years.

o Gold loans currently stand at INR600mn, offered from 44 branches; we expect

them to grow to INR2.5bn by FY15E. The company will be targeting locations

outside of South which is highly competitive and shortlist few locations where lot

of business activities are conducted.

• Currently, used CVs and tractors are offered only from 50-60% of branches and growth

in these segments will be primarily led by increased product coverage from all eligible

branches (100% branches for used CVs and 75% branches for tractors). We expect both

the portfolios to double from the current level by FY15 (forming 26% of AUMs by FY15E

from ~19% in FY13).

• Considering industry-wide stress in CV and commercial equipment segment, we expect

Magma’s growth to be muted in this segment (to account for less than 30% of AUMs in

FY15E from 39% in FY13).

Chart 7: Strategic decision to diversify from CV/CE towards higher yielding products (proportion of consolidated AUMs)


Note: Higher yielding product includes used CV, tractor, SME loans

Newly launched products includes mortgages and gold loans

Regional diversification, balanced distribution mitigates event risk

Besides strategic product diversification, management also believes in regional

diversification. Magma has pan-India presence via its 275 branches across 21 states,

marking ~70% coverage. No single state contributes more than 11% to AUM. Well

diversified approach will help minimise regional, local and single event risks.

CV/CE

63%

Car

23%

High

yielding

14%

FY11

Used CVs and tractors are offered

only from 50-60% of branches and

growth in these segments will be

primarily led by increased product

coverage from all eligible branches

No single state contributes more

than 11% to AUM

CV/CE

39%

Car

30%

High

Yielding

23%

Newly

launched

8%

FY13

CV/CE

29%

Car

29%

High

Yielding

31%

Newly

launched

11%

FY15E

Magma Fincorp


Chart 8: Balanced regional distribution minimises regional and local risks

Source: Company

Chart 9: Magma is rural/semi rural focused retail NBFC

Source: Company

Chattisgarh,

4%

Gujarat,

6%

MP,

7%

Maharashtra,

11%

AP,

10%

Karnataka,

5%Kerala,

5%

TN,

4%

Delhi/Uttarakha

nd

8%

Haryana,

6%

Punjab/HP

4%

Rajasthan

8%

UP

8%

Bihar

3%

Jharkhand

2%

Orissa

4%

WB

5%West -28%East-14%

North -34% South-24%

Rural

38%

Urban

19%

Semi-rural

43%



Multiple levers to boost RoEs to >15% by FY15E Magma’s RoE profile was weak in FY12/13 (at <10%) due to regulatory changes pertaining to

off-balance transactions. The company, however, reduced reliance on off-balance sheet

transactions from as high as 70% (FY06-09) to ~30% in FY13, which led to dip in NIMs below

4%. The strategy to normalise RoEs to >15% will be led by NIM improvement (particularly

yield enhancement). This further supported by competitive funding cost (AA+ rating for long

term debt) will help improve NIMs (of standalone entity) to 5.8% by FY15E.

Chart 10: RoA (standalone entity) to surge led by NIM expansion (yield enhancement)


Focus on higher yielding products

Rising share of high yielding products (tractors, used CVs, LAP, gold loans) from 29% in FY13

to 38% in FY15E is likely to benefit blended lending yields.

Chart 11: Rising contribution of higher yielding products to drive yield improvement


* Note : Higher yielding segments include Used CV, tractor, SME, LAP and Gold loans

Lower yielding segments include Car, CV/CE

3.2 4.7

0.7

1.1 1.2

0.7 3.3

3.5 0.5

1.2

0.4

0.6

0.0

3.0

6.0

9.0

12.0

15.0

FY13 FY15E

(%)

NII/assets Sec. Inc./assets Fees/assets

Opex/assets Prov/assets Taxes/assets

RoA=0.9

RoA=1.3

High

yielding

14%

Low

Yielding

86%

FY11

The strategy to normalize RoEs to

>15% would be led by NIM

improvement, particularly yield

enhancement. This further

supported by competitive funding

cost (AA+ rating for long term debt)

will help improve NIMs to 5.8% by

FY15

High

yielding

38%

Low

Yielding

62%

FY15E

High

yielding

29%

Low

Yielding

71%

FY13

Magma Fincorp


Higher contribution from securitised income

Magma’s reliance on off-balance sheet transactions has been high—more than 70% of AUM

were securitised in FY04-09. However, RBI’s stringent norms for assignment/securitisation

led to this proportion gradually falling to ~50%, 40% and 30% in FY11, FY12 and FY13,

respectively. Particularly in FY12, margins were hit by change in accounting policies on

recognition of securitisation income—to be amortised rather than booked upfront. Owing

to this, contribution from securitisation income (to net revenue) dropped sharply to 5% in

FY12 from ~35-45% over FY06-11. As the situation stabilises and considering unamortised

securitisation income of ~INR2.5bn in FY13 (to be accrued over next two-three years), we

expect contribution from securitisation income to overall revenue to increase from 5% in

FY12 to 16% in FY15E.

Chart 12: Contribution of securitisation income to stabilise


Fixed rate nature of lending: Run down of low yield products contracted in FY11

Interestingly, historical trend of contracted yields suggests that yields for core product

portfolio (cars, CV, CEs) originated in FY13 was higher (by 30-100bps) than yields contracted

in FY12 and loans originated in FY12 carried yields which were higher by 100-150bps than

FY11. Even if we assume 70-75bps compression in yields from the current level, run down of

portfolio with relatively lower yields originated in FY11 and FY12 will itself support yields

enhancement (expect 20-30bps yield improvement due to this).

48% 58%

28% 30%

28% 52%

24%

67%

70%

72%

0

61

121

182

242

303

FY11 FY12 FY13 FY14E FY15E

(IN

R b

n)

AUM

On book Off book (inc. amortized)

Off book (inc. upfronted)

3.0

11.0

19.0

27.0

35.0

43.0


(%)

Securitisation income/ Net revenue

Due to change in

accounting policies

Owing to RBI’s stringent norms for

securitisation contribution from

securitisation income (to net

revenue) dropped sharply to 5% in

FY12 from ~35%-45% over FY06-11

Even if we assume, 70-75bps

compression in yields from the

current level, run down of portfolio

with relatively lower yields

originated in FY11 and FY12 will

itself support rising yields



Chart 13: Run down of lower yield portfolio, contracted in FY11, to aid blended yields

Source: Company

Borrowing profile: Predominantly relied on bank; rating upgrade to aid diversification

While on the asset side, lending rate is largely fixed over the tenor, on the borrowing side,

Magma predominantly relies on bank borrowings (35% of overall) wherein it is likely to

benefit immediately from any cut in base rate of banks. Asset liability profile is also

favorably matched for falling interest rate scenario. Additionally, rating upgrades during

FY12 has opened up funding avenues, in turn limiting the concentration risk and allows

source for stable flow of funds.

Table 3: Recent rating upgrades to open funding avenues (debt market)

Chart 14: Well matched asset liability profile with floating nature of liabilities to aid margin in falling interest rate scenario

Source: Company

9.0

11.2

13.4

15.6

17.8

20.0

Car CV CE Used CV Tractor SME

(%)

FY11 FY13

220bps240bps150bps

Core portfolio

Instrument 31-Mar-10 31-Mar-11 31-Dec-12

Short term PR1+ A1+ A1+

Long term AA AA AA+

Preference capital AA- AA- AA

Sub debt AA- AA- AA

Perpetual debt A+ A+ AA-

0.0

12.0

24.0

36.0

48.0

60.0

Upto 6

months

6 mths - 1

yr

1-3 years 3-5 years > 5 years

(%)

Assets Liabilities

Rating upgrades in FY12 has opened

up avenues of funding, limiting

concentration risks

Banks

35%

Capital

market

21%

Others

11%

Securitisation

33%

Magma Fincorp


Productivity ratios to improve

As common branch network is used for all product verticals, employees per branch for

Magma are much on a higher side (due to diversified bouquet of nine products). Of the

7,300 employees, ~75% are field officers and staff cost accounts for bulk of operating cost.

Chart 15: Common branches for all products lead to higher employees/branch; staff costs account for bulk of opex


Businesses that Magma has been relying on off late for growth (used CVs, tractors, SME

loans) or newly launched businesses (home loan, gold loans etc) have different operating

dynamics, leading to higher cost structure. However, it has been able to manage opex/AUM

at ~3.5%, almost at par with peers. Employee productivity (AUM/employee at INR20mn) is

still 20-30% lower than peers as 20% of existing employees are recruited in last one year.

There is scope for productivity improvement as branch utilisation increases with reasonable

scale up and increased coverage of newly launched/acquired businesses.

Chart 16: Opex/AUM in line with peers but employee productivity (AUM/employee) 20-30% lower than peers


Cost-to-income ratio for Magma appears high at 65% vis-à-vis peers due to weak income

profile, but NIM improvement to 5.8% will itself bring down it down to ~53%.

12

17

22

27

32

37

Magma MMFS SHTF

(No

s.)

Employee/branch

FY12 FY13

2.0

2.6

3.2

3.8

4.4

5.0

Magma MMFS SHTF

(%)

Opex/AUM

FY12 FY13

33.0

38.4

43.8

49.2

54.6

60.0


(%)

Employee cost / total operating expenses

15

19

24

28

33

37

Magma MMFS SHTF

(IN

R m

n)

AUM/Employee

FY12 FY13

Employee productivity,

AUM/employee at INR20mn, is still

20-30% lower than peers and there

is scope for productivity

improvement



Chart 17: C/I appears elevated due to weak revenue profile Charts 18: Cost-to-income ratio to improve going forward….


Experienced management

Management under the able leadership of Mr. Mayank Poddar, Chairman, and Mr. Sanjay

Chamria, Vice Chairman & MD, has been instrumental in successfully piloting Magma

through rough waters in FY12 and focused efforts are still underway to set up a scalable and

resilient business model to achieve next level of growth.

Table 4: Experienced management to guide the way forward

Source: Company

26.0

38.2

50.4

62.6

74.8

87.0

Magma MMFS SHTF

(%)

Cost/Income

FY12 FY13

Mayank Poddar Chairman Supports policy formulation and guidance to the Management/Board

Over 30 years of experience in the financial sector

Sanjay Chamaria Vice Chairman & MD Anchors strategic policy formulation and execution

Drives new business initiatives and leads management team

Ashutosh Shukla COO,

Asset Financing Business

Experience of over 25 years in Magma and Consortium Finance. Setup North and West

Zone business and headed collections vertical in Magma earl ier

Sachin Khandelwal MD & CEO,

Magma HFC

Experience of over 20 years in sales and marketing. Ex-MD of ICICI Home Finance.

Joined Magma in Aug 2012

Vikas Mittal Business Head,

Gold Loans

Experience of over 20 years in brokerage and wealth management industry.

Ex- MD & CEO of Enam Direct & Ex-MD of Citi Wealth Advisors

Swaraj Krishnan CEO, Magma HDI

General Insurance

Veteran in the general insurance industry. Ex-CEO of Bajaj Al l ianz General Insurance

V Lakshmi

Narasimhan

Chief Financial Officer Experience of over 23 years in Magma and Consortium Finance. Incubated

SME Loans & Tractors business in Magma. Served as National Credit and Risk Head.

Kailash Baheti Chief Strategy Officer Ex-CEO of Century Extrusions. Extensive experience in finance, accounts,

compliance and legal functions

Sandeep Walunj Chief Marketing Officer Experience of over 20 years in consumer marketing in FMCG & Retail businesses.

Ex-CMO - Big Bazaar & Value Formats in Future Group; Joined Magma in Aug 2012

Mahendar Bagrodia Chief of Recievables

Management

Served as National Risk and Credit Head prior to current role. Experience of over 18

years of which 12 years with Magma Fincorp

Sumit Mukherjee Chief Sales Officer Served as National Sales Head and Credit and Risk Head of Magma prior to current

role. Worked with Citi corp. as VP, over 18 years of experience in sales

Bu

sin

ess

He

ad

Pro

mo

ter

dir

ec

tors

Fu

nc

tio

n H

ea

ds

41.0

50.2

59.4

68.6

77.8

87.0


(%)

Cost-income

Magma Fincorp


Valuation

Magma, over the years, has built a diversified (both product-wise and geography-wise),

scalable (people-centric with decentralised, but standardised processes) and profitable

business model. We are building in AUM CAGR of 20% over FY13-15E primarily led by newly

launched/acquired gold and home loan business and increased coverage of used CV and

tractors from all eligible branches (currently being offered from 50-60% branches). This,

coupled with margin improvement, will push RoA (for standalone entity on earnings assets

including assignment) towards the 1.3% trajectory over the next couple of years.

The market seems to have played down the company’s inherent scalable business model

and the stock trades at <1x FY15E consolidated book, a steep discount to peers owing to

weak RoE profile in wake of change in accounting policies in FY12. We expect the stock to

re-rate to 1.4x FY15E book, implying a target price of INR133 (upside of 45% plus),

considering RoA of 1.3% and RoE of >15% by FY15E. Also, the regulatory overhang has

eased to an extent with clarity on treatment of off-book assets, loan loss provisioning

requirement and capital adequacy.

We initiate coverage with ‘BUY/Sector Outperformer’ recommendation/rating on the stock.

Chart 19: Historical price-to-book value band (on standalone entity’s networth)

Source: Bloomberg, Edelweiss research

Table 5: Relative valuation metrics – Magma trades at a steep discount to its peers

Source: Bloomberg, Edelweiss research

0.0

0.4

0.8

1.2

1.6

2.0

Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13

(x)

MGMA IN Equity

CMP MCap AUM (FY13) EPS CAGR (%)

(INR) (INR bn) (INR bn) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY13-15E FY14E FY15E

Magma Fina nce 90 17 162 83 95 1.1 0.9 11 15 8.1 5.9 44.1 13.0 16.0

Mahindra & Mahindra Finance 277 158 279 92 109 3.0 2.5 18.1 22.8 15.3 12.2 24.8 21.2 22.7

Shri ram Tra ns port 679 154 497 369 435 1.8 1.6 69 81 9.8 8.4 16.3 20.3 20.2

Baja j Fins erv 1,387 69 175 821 935 1.7 1.5 135 162 10.3 8.6 18.5 17.9 18.0

Sunda ram Finance 549 61 176 216 252 2.5 2.2 42 49 13.0 11.3 14.8 20.9 20.7

Shri ram City Union Finance 989 55 158 497 602 2.0 1.6 95.7 117.7 10.3 8.4 20.5 21.6 21.4

BV (INR) P/BV (x) EPS (INR) P/E (x) ROE (%)

The market seems to have played

down the company’s inherent

scalable business model. The stock

trades at <1x FY15E consolidated

book, a steep discount to peers



Key Risks

Cyclicality of auto segment

Despite diversifying in nine segments, auto financing (cars, CV, CE) still contributes ~70% to

AUM. The growth and asset quality performance in these businesses would be correlated to

underlying industry dynamics. Hence, Magma’s earnings as well will be subject to

seasonality and cyclicality of the same.

Execution risk for newly launched/acquired businesses

Magma has recently acquired GE’s mortgage portfolio and has launched gold loan business.

The operating dynamics of this product segment are distinct from the company’s existing

product bouquet. While management has set an aggressive target for itself by planning to

utilise its current network, making a significant dent and gaining market share in these

highly competitive product segments will be a key challenge.

Moreover, sub-standard proportion (at 8% of AUMs) in acquired GE mortgage portfolio is

much higher than industry average. Magma’s ability to manage and bring it under control

will be critical. SME lending—while it has been the best performing segment till date (having

gone through three cycles), entirely unsecured nature poses risk to delinquency.

Lower Tier 1 ratio at 10.6%

In FY13, Magma’s Tier 1 ratio came off to 10.6% from 14.1% primarily due to acquisition of

home loan portfolio and 20% AUM growth in existing businesses, while RoE were in low

double digit. Estimating scale in new businesses, we expect AUM growth of >20%, while

RoEs will be in 15-18% range making it necessary for the company to go in for equity dilution.

We have not factored in any capital raising and consequently RoE dilution in our estimates.

Banking license can pose risk to near-term RoEs

Magma is one of the 26 applicants who have thrown in their hat in the ring for new bank

license. Availing banking licence can be structurally positive in the long run as it provides: (1)

access to huge savings pool of India; and (2) lends scalability/diversity on asset as well

liability fronts.

However, in the short to medium term there will be pain due to costs attached: (1)

regulatory cost: To be drag on CRR, SLR, PSL; (2) operational cost: Financial inclusion

(branches in tier-5/6 cities) will be a costly affair due to high gestation period; and (3)

execution risk: Competition, talent acquisition/retention and training of existing staff.

While challenges will be relatively limited for Magma given its lower asset base, existing

presence in rural locations and established brand name in areas of its operation, RoEs will

still be under pressure in the near to medium term.

Magma Fincorp


Company Description

Magma is one of the leading NBFCs offering a range of financial products with pan-India

presence. The company finances purchase of a gamut of products such as CVs, tractors, cars,

used vehicles, gold as well as construction equipment with mortgages added recently to its

portfolio. It has a strong network of 275 branches spread across 21 states/ Union Territories

in India, covering ~3,000 business clusters with INR162bn assets under management.

Fig. 4: Magma’s history of business scale up

Source: Company

1989 Started financing business

1996 Started retail financing

2001 Acquisition of consortium finance

2006 Used CV business launched

2008�

�

Started implementation of vertical business structure

Merger with Shrachi

2009 SME business launched

2010 JV with HDI Gerling for general insurance business

2012

�

�

�

�

�

Appointed KPMG as statutory auditors

KKR and IFC invest INR4.39bn for 27.8% stake

CARE upgrades ratings

Securitisation and related accounting policy streamlined

Management bandwidth expanded

2013

�

�

�

�

�

Acquisition of GE’s mortgage business

Gold loans business launched

General insurance business starts operations

Oracle appointed for implementation of digital express highway

Genpact appointed for process re-engineering initiatives



Financial Outlook

Volatile earnings due to regulatory changes in FY12

Magma’s earnings have been highly volatile since the past two-three years, particularly in

FY12 when RoA dipped below 60bps (from 125bps in FY11) on back of significant dent in

margin, largely attributed to change in accounting policies.

Reliance on off-balance sheet transactions took a toll on earnings

Magma used to securitise more than 50% of loans originated in a year and would accrue

securitisation spreads of ~6% upfront. This led to 35-45% of net revenues being driven by

securitisation income. However, regulatory changes with respect to minimum retention

period and amortisation of income took a toll on earnings in FY12. The change in accounting

policy led to significantly lower contribution of this income stream to net revenue (from

35% in FY11 to 4.5% in FY12) leading to huge volatility in NIMs. Margin declined 170bps in

FY12 (from 4.6% in FY11). This income stream has stabilised to a great extent in FY13 and

will further improve as we move into FY14 and FY15.

Chart 20: Increased contribution from securitisation income.. Chart 21: .. also to aid margin expansion


Securitisation income: Regulatory change requiring amortisation of

securitisation/assignment income rather than being upfronted affected the contribution

from securitised income. Securitised income is now amortised over three-four years. With

changes implemented with effect from FY12, the first year was most adversely affected and

in FY13 it has stabilised to some extent. Full benefit will flow from FY15 as it will include

income from past four years’ pool. Unamortised securitization income stands at INR2.5bn as

of FY13.

Collection/support services (included in other income): Collection/support services are

now being classified under other income vis-à-vis earlier classification under revenue from

operations, rendering lumpiness to other income on a small base. The income booked is

equivalent to 0.2-0.4% of AUMs. However, this pool is likely to run down by FY15, after

which we expect other income to stabilise.

0.0

1.6

3.2

4.8

6.4

8.0


(x)

NII (excl. securitisation)/Assets Securitised Income/Assets

0.0

1.4

2.8

4.2

5.6

7.0


(x)

NII / Assets (incl. securitisation …

The change in accounting policy for

amortisation of securitisation

income led to significantly lower

contribution of this income stream

to net revenue, from 35% in FY11 to

4.5% in FY12, leading to huge

volatility in NIMs

Magma Fincorp


Brokerage and commission (included in other operating expenses): Magma now amortises

brokerage and commission expenses (equivalent to 1.2-1.3% of incremental disbursements)

over the tenor of the loan rather than upfronting them. Having adopted this since FY12,

reported operating expenses were almost flat in FY12 (over FY11) despite 25% plus AUM

growth. This expense line item saw an uptick in FY13 and will further move till FY15 as

amortisation of past three-four years will come into play.

Inherent business model continues to be resilient

Despite tough macro and regulatory changes, Magma’s underlying core business model was

resilient enough to weather the challenges, rendering comfort that conditions would

stabilise sooner than later. While it significantly lowered reliance on off balance sheet, AUM

growth remained robust at 25% over FY11-13 (excluding acquired home loan portfolio).

Additionally, management further strengthened its business model by diversifying its

product suite (bought GE mortgage portfolio, launched gold loans and gained traction on

SME business) which will sustain AUM growth at 20% plus CAGR over FY13-15E.

Chart 22: Disbursement/AUM growth continued to be robust despite trying times owing to inherent resilient business model


Yield enhancement key to RoE improvement

With opex/AUMs at 3.5% being almost at par with peers (though there is a scope of further

productivity improvement) and credit cost at <50bps being amongst the best-in-class,

management’s strategy to scale up RoAs to 1.3% will be led by margin improvement

(particularly yield enhancement). We believe NIMs will undergo structural improvement to

5.8% by FY15E due to:

1) Rising share of higher yielding products in asset mix (tractors, used CVs, LAP, gold loans)

from 29% in FY13 to 39% in FY15E.

2) Boost to securitisation income, considering unamortised securitisation income of

INR2.5bn in FY13 to be accrued over next two-three years; contribution from

securitisation income to overall revenue to increase from 5% in FY12 to 16% in FY15E.

3) Run down of portfolio originated in FY11 and FY12 at relatively lower yields will itself

support yield improvement to the extent of 20-30bps (despite assuming 70-75bps

compression in card rates from the current level).

13.0

19.4

25.8

32.2

38.6

45.0

36

61

86

111

136

161


(%)

(IN

R b

n)

Disbursement Disbursement growth (RHS)

12.0

18.0

24.0

30.0

36.0

42.0

65

111

157

202

248

294


(%)

(IN

R b

n)

AUM AUM growth (RHS)

While it significantly lowered

reliance on off balance sheet, AUM

growth remained robust at 25%

over FY11-13, excluding acquired

home loan portfolio



We expect Magma’s RoA to improve to 1.3% in FY15E (from 0.9% in FY13), translating into

RoE of >15% on back of NIM expansion; however, pushed down by modest rise in credit

costs.

Chart 23: Margin expansion and controlled opex. to drive RoA re-rating


Consolidated RoE to retrace to 16% with earnings CAGR of 45%

We have reported financials on standalone basis; however, on consolidated basis, there

would be following additions: (1) 74% of MITL (tractor finance business); (2) 37% of Magma

HDI (General Insurance Company); (3) 100% of Magma Housing Finance (MHFL).

Fig. 5: Financial structure

Source: Company

Magma ITL (MITL): MITL is a joint venture of Magma Shrachi Finance (MSFL) with

International Tractor (ITL). MSFL holds 74% in JV while ITL holding 26%.

Magma HDI: It is a JV between Magma and HDI Gerling (German insurer) with Magma

holding 37% stake in JV.

2.7 3.2 4.7

0.2 0.7

1.1

0.0

2.5

5.0

7.5

10.0

12.5

FY12 FY13 FY15E

(%)

NII/assets Sec. Inc./assets Fees/assets

Opex/assets Prov/assets Taxes/assets

RoA=0.6

RoA=0.9

RoA=1.3

Magma standalone

(100%)

MHF (100%)

Magma FincorpConsolidated

MHDI

(37%)

MITL

(74%)

On consolidated basis there would

be following additions: 1) 76% of

MITL (tractor finance business); 2)

37% of Magma HDI (General

Insurance Company); 3) 100% of

Magma Housing Finance Limited

Magma Fincorp


Magma Housing Finance (MHFL): Magma acquired 100% equity share capital of GE Money

Housing Finance (GEMHF), a housing finance company. GEMHF is now renamed Magma

Housing Finance (MHFL), which will be a vehicle for future housing loan originations.

Additionally, Magma acquired entire home equity loan portfolio of GE Money Financial

Services (GEMFSPL). While INR3bn of home equity portfolio is retained in standalone entity,

balance is shifted to housing finance company.

Table 6: Acquired mortgage portfolio profile

Source: Company

*Note: Includes Future Principal + outstanding EMI

On consolidated basis, we expect earnings CAGR of ~45% over FY13-15E, higher than 40%

growth on standalone basis driven by scale up of MHFL and MITL. We expect MHDI to

continue to incur losses even in FY14. We expect consolidated RoEs (after payment of

preference share dividend) to inch up to 16% by FY15 from current 10%.

Table 7: Consolidated earnings CAGR of 44% over FY13-15E and RoEs of 16%


*Note: RoE is calculated after providing for preference share dividend

Key parameters Housing finance Home equity

Portfolio size (INR bn) * 6.6 9.4

Average ticket size (INR mn) 1.5 1.8

Average seasoning (months) 56 48

Weighted average LTV at origination (%) 54 42

Total portfolio locations 37 55

FY12 FY13 FY14E FY15E

Consolidated PAT (INR mn) 740 1,391 2,118 2,889

Consoliated NW (INR mn) 11,015 13,974 15,695 18,117

Consolidated BV (INR) 58.1 73.6 82.6 95.4

Consolidated RoE (%) 6.9 9.7 13.0 16.0

We expect consolidated ROEs to

inch up to 16% by FY15 from

current 10%



Financial Statements (Standalone entity)

Assumptions

FY12 FY13 FY14E FY15E

GDP(Y-o-Y %) 6.2 5.0 6.0 7.0

Inflation (Avg) 8.9 7.4 5.2 6.0

Repo rate (exit rate) 8.5 7.5 6.8 6.0

USD/INR (Avg) 48.0 54.5 58.0 56.0

Credit growth (%) 17.1 14.7 15.0 16.0

Bank's base rate (%) 10.5 9.7 9.5 9.3

Wholesale borrowing cost (%) 10.5 8.9 8.7 8.5

G-sec yield (%) 8.5 7.8 7.6 7.5

Operating metric assumptions (%)

Yield on advances 8.7 10.9 12.3 12.6

Cost of funds 11.5 11.5 11.2 11.1

NIMs 2.9 4.0 5.2 5.8

Employee cost growth 10.7 36.1 26.0 19.3

Other opex growth -9.2 63.9 23.3 14.3

Tax rate 22.9 31.5 33.0 33.0

Dividend payout 23.2 12.4 10.0 10.0

Secutisation Income 189 1,013 1,797 1,993

Balance sheet assumption (%) 0.1 0.1 0.1 0.1

Disbursement growth 36.7 17.2 25.3 18.9

Repayment/prepayment rate 39.5 35.5 35.5 34.6

Securitised Asset 42.4 32.4 26.2 25.0

Gross NPLs 0.0 1.8 2.4 2.7

Provisioning coverage 100.0 20.8 35.0 50.0

Number of employees 5,900 7,100 7,963 8,766

Number of branches 200 275 330 375

Income statement (INR mn)


Interest income 8,925 13,339 18,181 22,443

Interest charges 5,985 8,874 11,380 13,460

Net interest income 2,939 4,465 6,801 8,983

Securitization income 189 1,013 1,797 1,993

Fee & other income 1,047 1,603 1,369 1,411

Net revenues 4,175 7,081 9,967 12,388

Operating expense 3,020 4,535 5,646 6,582

- Employee exp 1,490 2,028 2,556 3,048

- Depreciation /amortisation 296 367 425 484

-commission expense on sale 378 915 1,257 1,429

- Other opex 856 1,225 1,408 1,620

Preprovision profit 1,155 2,546 4,321 5,806

Provisions 334 754 1,609 2,227

PBT 821 1,792 2,712 3,579

Taxes 188 564 895 1,181

PAT 632 1,228 1,817 2,398

Reported PAT 632 1,228 1,817 2,398

Basic number of shares (mn) 190 190 190 190

Basic EPS (INR) 2.6 6.5 9.6 12.6

DPS (INR) 0.6 0.8 1.0 1.3

Payout ratio (%) 23.2 12.4 10.0 10.0

Growth ratios (%)


NII growth 23.2 51.9 52.3 32.1

Net revenues growth (18.0) 69.6 40.8 24.3

Opex growth (0.4) 50.2 24.5 16.6

PPP growth (44.0) 120.5 69.7 34.4

Provisions growth (6.0) 125.8 113.2 38.4

PAT growth (44.7) 94.2 48.0 32.0

Operating ratios (%)


Yield on advances (on-book) 15.1 15.2 15.8 15.8

Yield on advances (off-book) 0.4 2.0 3.4 3.6

Yield on advances (total AUM) 8.7 10.9 12.3 12.6

Cost of funds 11.5 11.5 11.2 11.1

Spread 3.5 3.7 4.6 4.7

Net interest margins 2.9 4.0 5.2 5.8

Cost-income 72.3 64.0 56.6 53.1

Tax rate 22.9 31.5 33.0 33.0


Magma Fincorp

Balance sheet (INR mn)

As on 31st March FY12 FY13 FY14E FY15E

Equity capital 380 380 380 380

Reserves 10,434 11,356 12,776 14,708

Net worth 10,813 11,736 13,156 15,088

Preference capital 1,427 1,614 1,614 1,614

Secured loans 51,713 75,220 86,835 106,674

Unsecured loans 8,089 19,096 22,045 27,081

Total borrowings 59,801 94,316 108,880 133,755

Assignment 51,050 52,640 51,824 59,859

Total liabilities 123,091 160,307 175,474 210,317

Loans 66,520 96,905 115,263 141,825

Investments 333 2,205 2,205 2,205

Current assets 10,873 16,565 13,908 15,413

Current liabilities 7,238 9,191 9,272 10,275

Net current assets 3,635 7,374 4,636 5,138

Fixed assets (net block) 1,788 1,744 1,769 1,585

Deferred tax asset (236) (561) (224) (295)

Assignment 51,050 52,640 51,824 59,859

Total assets 123,091 160,307 175,474 210,317

Earning assets (EA) 68,701 104,740 120,335 147,582

EA (incl. assignment) 119,751 157,380 172,159 207,442

Disbursements 71,340 82,617 103,481 123,004

Assets under management 116,237 147,557 177,087 211,684

On-book assets 65,187 94,917 125,263 151,825

Assigned/Securitised 51,050 52,640 51,824 59,859

On-book assets (%) 56 64 71 72

Assigned/Securitised (%) 44 36 29 28

Securitisation income 185 1,020 1,797 1,993

Peer comparison valuation

Market cap Diluted PE (X) Price/BV (X) ROAE (%)

Name (USD mn) FY14E FY15E FY14E FY15E FY14E FY15E

Magma Fincorp 282 8.1 5.9 1.1 0.9 13.0 16.0

Rural Electrification Corporation 3,220 4.4 4.0 0.9 0.8 23.0 21.4

HDFC 21,760 22.3 19.1 4.6 4.1 21.7 22.8

Infrastructure Development Finance Co 3,239 9.1 7.7 1.2 1.1 14.6 15.3

LIC Housing Finance 1,937 9.0 7.4 1.4 1.2 18.1 17.6

Mahindra & Mahindra Financial Services 2,580 15.3 12.2 3.0 2.5 21.2 22.7

Manappuram General Finance 148 3.3 2.8 0.3 0.3 10.7 12.0

Multi Commodity Exchange of India 621 15.1 12.9 2.9 2.7 20.0 20.9

Muthoot Finance 588 4.0 3.5 0.8 0.7 21.4 20.4

Power Finance Corp 2,999 3.5 3.0 0.7 0.6 20.1 19.9

Reliance Capital 1,461 10.6 9.3 0.7 0.7 6.7 7.3

Shriram City Union Finance 912 10.3 8.4 2.0 1.6 21.6 21.4

Median - 9.1 7.7 0.8 0.7 20.1 19.9

AVERAGE - 9.7 8.2 1.3 1.2 15.7 15.8

Source: Edelweiss research

RoE decomposition (%)


Net interest income/Assets 2.7 3.2 4.1 4.7

Securitised Income/Assets 0.2 0.7 1.1 1.1

Other Income/Assets 1.0 1.2 0.8 0.7

Net revenues/Assets 3.8 5.1 6.0 6.5

Operating expense/Assets 2.8 3.3 3.4 3.5

Provisions/Assets 0.3 0.5 1.0 1.2

Taxes/Assets 0.2 0.4 0.5 0.6

Total costs/Assets 3.3 4.2 4.9 5.3

ROA 0.6 0.9 1.1 1.3

Equity/Assets 7.4 8.0 7.4 7.3

ROAE 7.6 10.9 14.6 17.0

Valuation metrics


Diluted EPS (INR) 2.6 6.5 9.6 12.6

EPS growth (%) (67.0) 149.6 48.0 32.0


Diluted P/E (x) 34.8 13.9 9.4 7.1

Price/ BV (x) 1.6 1.5 1.3 1.1

Consolidated financials


PAT (INR mn) 740 1,391 2,118 2,889

Networth (INR mn) 11,015 13,974 15,695 18,117

Diluted EPS (INR) 3.9 7.3 11.2 15.2


Consol ROE (%) 6.9 9.7 13.0 16.0

P/E (Cons) (x) 23.1 12.3 8.1 5.9

Price/ BV (Cons) (x) 1.6 1.2 1.1 0.9



*in last one year

*in last one year

Insider Trades

Reporting Date Acquirer / Seller B/S Quantity Traded

10-Apr-13 India Capital Fund Limited Sell 3,190,000

14-Nov-11 Microfirm Softwares Pvt Ltd Buy 10,000,000

5-Sep-11 Citigroup Global Mkts. (Mauritius) Pvt. Ltd. Sell 4,147,940

16-Aug-11 Microfirm Softwares Pvt Ltd Buy 1,244,685

7-Jul-11 Zend Mauritius VC Investments Buy 26,854,375

Bulk Deals

Date Acquirer / Seller B/S Qty Traded Price

10-Jun-13 Clsa (Mauritius) Ltd Sell 4,916,706 92.8

10-Jun-13 Goldman Sachs Singapore Pte Buy 5,162,246 92.8

25-Mar-13 Sundaram Select Midcap Sell 2,160,269 85.0

25-Mar-13 Lavender Investments Ltd Buy 2,265,885 85.0

20-Mar-13 Lavender Investments Ltd Buy 4,967,121 85.0

Holding – Top10 Perc. Holding Perc. Holding

Zend Mauritius VC Investments 14.14 International Finance Corporation 12.11

Lavender Investments 7.33 Wellington Management Company LLP 6.45

India Capital Fund 5.13 Macquarie Bank 2.65

CLSA Mauritius 2.59 KKR Mauritius Direct Investments 1.93

Deutche Securities Mauritius 1.23 Dimensional Fund Advisors 0.01

*as per last available data

* Source: Bloomberg

Additional Data

Directors Data

Mayank Poddar Chairman Sanjay Chamaria Vice-Chairman & Managing Director

Nabankur Gupta Director Neil Graeme Brown Director

Narayan K Sheshadri Director Satya Brata Ganguly Director

Kailash Nath Bhandari Director Sanjay Nayar Director

Auditors - B S R & Co

*as per last annual report


Company Absolute

reco

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reco

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risk

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reco

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reco

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Risk

Allahabad Bank BUY SP M Axis Bank BUY SO M

Bank of Baroda BUY SP M Federal Bank BUY SO L

HDFC HOLD SP L HDFC Bank HOLD SP L

ICICI Bank BUY SO L Indian Overseas Bank HOLD SU M

IndusInd Bank BUY SP L IDFC BUY SO L

ING Vysya BUY SO L Karnataka Bank BUY SO M

Kotak Mahindra Bank REDUCE SU M LIC Housing Finance BUY SO M

Mahindra & Mahindra Financial Services BUY SO M Manappuram General Finance BUY SP H

Multi Commodity Exchange of India BUY SO M Muthoot Finance BUY SO M

Oriental Bank Of Commerce BUY SO L Power Finance Corp BUY SO M

Punjab National Bank HOLD SU M Reliance Capital BUY SO M

Rural Electrification Corporation BUY SO M Shriram City Union Finance BUY SO M

South Indian Bank HOLD SP M State Bank of India BUY SO L

Union Bank Of India BUY SO M Yes Bank BUY SO M

Development Credit Bank BUY SO M

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe

within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return



Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services

Allahabad Bank, Axis Bank, Bank of Baroda, Federal Bank, HDFC, HDFC Bank, ICICI Bank, Infrastructure Development Finance Co Ltd, IndusInd Bank, Indian

Overseas Bank, Karnataka Bank, Kotak Mahindra Bank, LIC Housing Finance, Multi Commodity Exchange of India, Manappuram General Finance,

Mahindra & Mahindra Financial Services, Muthoot Finance, Oriental Bank Of Commerce, Punjab National Bank, Power Finance Corp, Reliance Capital,

Rural Electrification Corporation, State Bank of India, Shriram City Union Finance, South Indian Bank, Union Bank Of India, ING Vysya, Yes Bank

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 120 49 17 186

* - stocks under review

Market Cap (INR) 118 56 12

Date Company Title Price (INR) Recos

Recent Research

02-Jul-13 Development

Credit Bank

Sailing smooth post

weathering the storm;

Initiating Coverage

47 Buy

25-Jun-13 Union Bank

of India

Asset quality stable despite

testing times;

Visit Note

177 Buy

17-Jun-13 Oriental Bank

of Commerce

Asset quality risks to stabilise;

NPLs below 3% by FY14;

Visit Note

237 Buy

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to


Magma Fincorp

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