A low base and improving credit cycle will drive high earnings growth for Magma. Its shift to select segments has expanded NIM, which we believe is fully reflected in 4QFY16; moderate loan growth coupled with operating leverage benefits will drive earnings from here.
Trends in NPL/provisions in the backdrop of tightening NPL norms and increasing coverage, supported by improving credit cycle, remain crucial. We revise estimates, retain add with target price of `105 (`90 earlier).
We expect Magma to deliver 4% AUM growth in FY2017E, which will likely accelerate to 10-15% over the next two years, as compared to 7% decline in FY2016. In the earnings call, the management highlighted that the operational restructuring process, which led to
exit of about 550 employees, is almost complete. Its business over the past two months (March and April) has been strong supporting its aggressive (35% disbursement/12% loan) growth guidance.
Magma’s NIM expansion due to its strategy to focus on select segments (mortgages, SME loans, used vehicles and tractor loans) has almost fully played out. The share of these products will likely increase to 70% of loans by FY2017E from 58% of loans in FY2016. Three of the above segments, viz. SME loans, used vehicles and tractors are NIM boosters.