For those who like to watch, here is the summary video:
Three years ago, a Kolkata-based listed NBFC named Magma Fincorp was still recovering from the Covid stress on its books. Its portfolio was concentrated mainly in second-hand vehicle funding (52%), affordable housing (30%), SMEs (12%), etc. The GNPA stood at 8.2%, write-offs were increasing, and on top of that, their general insurance business was struggling.
To change its fortunes, in Feb 2021, there was news that Adar Poonawalla’s Rising Sun Holdings would acquire a 60% stake in Magma Fincorp by infusing ₹3456 Cr of capital through a preferential issue. Since then, things started to change for the better for Magma. Now, they are bringing in a new MD & CEO from HDFC Bank to facilitate the next leg of growth, which looks interesting.
Generally, capital infusion backed by a large group, balance sheet cleanup & new management in place may be the perfect recipe for delivering growth.
So, let’s see how things are moving for them.
A look back at Magma Fincorp
Magma Fincorp was founded in 1988 by Mayank Poddar and Sanjay Chamria, who were part of the company until Dec 2021. The NBFC was backed by investors like KKR India, IFC, Amansa, etc. They ventured into the housing and insurance spaces with a JV from HDI Global; however, none of these moves helped them achieve the next level of growth. Here is a snapshot of Magma at the time of acquisition by Poonawalla: an OKish company, but nothing extraordinary then.
*Snippet from Annual Report 2020-21
The Poonawalla impact: A fresh start
1) Infusion of huge fresh capital
Rising Sun Holdings (owned by Mr. Adar Poonawalla and not by Serum Institute) infused 3456 Cr in May 2021.
Post the capital infusion:
- The networth increased from 2194 Cr to 5650 Cr.
- Tier 1 capital rose from 25.2% to 66.8%.
- Leverage decreased from 3.8x to 1.3x.
The scale of equity dilution/capital infusion is huge. Magma was not in such a dire state to need such large amounts infused into the company. It’s still doing decently (struggling, but nothing alarming). However, this tells us one thing: Poonawalla is keen on growing this NBFC. The intent is clear – They want to turn it into a lending powerhouse.
2) Cleaning the Balance sheet & Portfolio restructuring
After the capital infusion, the company moved to an accelerated write-off policy, with a one-time write-off of 274 Cr, and took an additional provision of 621 Cr. They restructured the portfolio, becoming more prudent and conservative in their lending and reporting practices.
*Source: Q4FY21 Investors Presentation
How to read the above table?
When a bank or lender gives out loans, they sort them into three groups based on how well people are paying them back.
- Stage 1 is for loans that are doing just fine—people are paying them back on time, no worries there.
- Stage 2 is when there’s a bit of trouble; maybe someone’s finding it hard to keep up with their payments, so the bank might work out a new plan to make it easier for them.
- Stage 3 is when things get serious, and the person hasn’t been able to pay back the loan for a while, making the bank worried about getting their money back.
This system helps the bank keep track of how all the loans are doing. When an NBFC reclassifies more borrowers into Stage 2 and Stage 3, it says that it is being prudent and taking conservative steps.
3) Changed the core team
After the takeover, the entire main team was replaced. This included CEO Vijay Deshwal, CTO Gaurav Sharma, and Chief Risk Officer Sharad Pareek leaving the company. Additionally, the board chose to replace the current MD & CEO, Abhay Bhutada, with Arvind Kapil, who previously led the Mortgage business at HDFC Bank.
Having said that, that this sort of turnover is typical after significant mergers or acquisitions as the company works to realign with its new goals and vision.
4) Shift towards Retail lending
Since 2021, the company has been gradually phasing out stressed businesses like CV and tractor lending, redirecting its focus towards retail products such as personal loans, consumer durables, and housing. Retail lending, which was virtually nonexistent for Magma, now accounts for 16% of the overall portfolio. They are also reducing their exposure to Agri loans, which previously constituted around 7% of the portfolio but now only make up 3%. Similarly, affordable housing, once at 28% of the portfolio, has decreased to 17%.
However, there has been a significant push in the SME segment, with its share of the book rising from 10% to 42%. According to the management, retail, home loans, and MSMEs will continue to be the main focus areas for growth going forward.
5) Reduction in cost of funding & Going fully digital
With such a huge infusion of capital and backing from strong promoters, the cost of funding has drastically reduced for the company. Initially borrowing at 9.6%, it has now come down to 7.9%. The credit rating has improved from AA- to AAA, akin to Bajaj Finance and Jio Finance. During the same period, NIMs improved from 8.5% to 11%.
On the other hand, the company closed around 150 physical branches and adopted a digital-first strategy. The digital business increased from 10% to 80% of their current incremental business. This also helped increase the AUM per employee from 2.1 Cr to 10 Cr.
*Source: Poonawalla Fincorp Q3FY24 Investors Presentation
Following the playbook of Bajaj Finance
Poonawalla Fincorp is closely following the playbook of Bajaj Finance, albeit with a lag of 5 years. They are expanding their product portfolio to include business loans, personal loans, LAP, consumer finance, medical equipment loans, etc. Additionally, they are now launching a co-branded credit card in partnership with IndusInd Bank (Bajaj Finance is partnered with RBL Bank).
The company is moving in the right direction. Over the last two years, disbursements have increased by 5.5 times, reaching 8700 Cr in the Q3FY24 quarter.
Furthermore, the company has partnered with Cars24 to target the pre-owned car market. With consumer financing penetration in the used cars industry standing at only ~20%, management is confident that this segment will drive growth.
Management is optimistic about achieving 35-40% AUM growth and 30-35% PAT growth. They also aim to maintain asset GNPA in the range of 1.3% to 1.8% and ROA of 4% to 4.5%.
Valuation: Fully priced. Premium may continue.
The company currently has a net worth of 8075 Cr and is trading at a market cap of 35,000 Cr, valued at a price-to-book ratio of 4.3 times TTM. If we expect the NBFC to achieve a 15% growth in book value, then we are looking at an estimated net worth of 9200 Cr in the next one year. This translates to around a 3.8 times price-to-book ratio. While the ROA is decent at 4%, the ROE is only at 8%, due to low leverage of around 2 times. As the company continue to grow without diluting equity, ROE should improve gradually over the next 2-3 years.
The company is not trading cheaply. Having said that, they are delivering. They doesn’t need to dilute equity to fund the growth in the near future. The market may continue to give premium to the company because of the promoter group, healthy balance sheet & strong growth.
To summarize:
- Poonawalla Fincorp’s turnaround is a success, and it is now focusing on growth.
- The balance sheet clean-up is done, and the focus is now on retail & MSME lending.
- The management is confident of clocking 35-40% AUM growth and profit growth of 30-35% by maintaining strong asset quality with GNPA between 1.3% to 1.8%.
- Following the Bajaj Finance playbook with a digital-first strategy and consumer lending.
- They are bringing in Arvind Kapil as the new MD & CEO from HDFC Bank to drive the next leg of growth.
- The stock is currently fully valued at 3.8 times one-year forward Price to Book. But the market may continue to give a premium for the company as long as it delivers the growth.
- The key risk is that consumer lending is becoming a crowded field, with major players such as Jio Finance, Bajaj Finance, HDB Financials, and many BNPL apps targeting the same market segment.
Disclosure: Poonawalla Fincorp is part of our Capitalmind Premium Portfolios. This article is for information only and should not be considered a buy or sell recommendation for any stocks.
