Magma Fincorp's Q3 FY13 earnings better than expected

MUMBAI: Magma Fincorp's performance in the quarter ended December was better than expected driven by robust growth, healthy margins and stable asset quality. The credit growth is likely to continue given the diversified portfolio and rural penetration.

The NBFC (non-banking financial company) reported a 35% year-on-year jump in its assets under management due to higher than system disbursements in cars, tractors and used commercial vehicles. The higher growth came despite a 3% decline to 72% in loan-to-value ( LTV).

The net interest margin, which is the yield on advances over cost of funds has been improving and was over 5% this quarter due to larger proportion of high yielding loans like used CV and tractors in its portfolio. Also, since it has a higher proportion of variable rate borrowings from banks, with interest rates coming down, its cost of funds will reduce thereby improving margins going ahead.

The asset quality was largely stable due to its strong loan origination capabilities. Magma Fincorp has made its NPA (non-performing assets or bad loans) recognition policy more stringent as it plans to reduce it to 120 days from 180 days as per RBI's new draft regulations.

It has a lower capital adequacy ratio of 16.6% compared to its peers. The management plans to raise Rs 5 billion to support its loan growth for the next three years and also meet the new higher capital requirements as per the new RBI draft guidelines.

At Rs 99.50, it is trading a price-to-book value of 1.7, a discount compared to its peers. Given the healthy earnings visibility, the stock is most likely poised for a re-rating.