Magma Fincorp (Magma), in the quarter of transition to a new developer and new management, reported a consolidated loss of 6.5 billion rupees despite stable operating profit of 1.9 billion rupees. The position reflects cautious provisioning by the new management as it accelerated write-offs by 2.74 billion rupees and created a covid 2.0 contingency buffer of 6.2 billion rupees. The provisioning of ECL amounts to 9.5% of assets under management with a net level 3 at only 1.2%, reflecting the anticipation of a greater part of the stress. New leadership unveiled 2025 vision to become a leading and most trusted NBFC for consumer and business finance; the vision describes the main strategic pillars reflecting the direction of the company. We attribute a high likelihood of improving operating metrics and medium-term performance profile based on: 1) strong corporate group support, 2)> 68% CAR (post-injection), 3) improved credit rating outlook and 4) business competitiveness. This niche franchise can grow to 2.0 times the book value after trade, and we are revising our price target to Rs 173 (previously: Rs 125). Maintain BUY. The management transition and the execution of the new strategy remain key elements of control.

– Provisioning for initial stress before the transition to new management: the company accelerated write-offs by adopting a cautious policy from T4FY21 where the write-off of asset-backed loans (car, CV, CE, used assets, etc. .) was done on accounts getting 180 + dpd, for unsecured SME loans at 90 + dpd, and affordable home loans at 730 + dpd. This led to a one-time write-off of 2.75 billion rupees. Phase 3 assets increased from 6.9% to 3.7% QoQ; However, the company also cautiously created an additional Covid 2.0-related buffer of Rs 6.2 billion. With this, it now includes cumulative provisions of Rs11.9 billion – 4% coverage on phase 1 assets, 28% on phase 2 assets and 69% on phase 3 assets. restructuring amounted to 4.3% of consolidated outstandings (4.5% of stand-alone outstandings and 3.3% of mortgage loans) with 17% provisioning coverage. An exceptional ECL provision of 9.5% of assets under management and 1.2% of phase 3 net assets suggest an adequacy of the buffer to counter challenges related to covid. This will also result in lower additional credit costs. The consolidation of assets under management continued with the discontinuation of a few product segments, which resulted in a decrease of 5% QoQ / 12% YoY at T4FY21 to Rs142bn.

– New Management Vision 2025: The company unveiled the new management vision 2025: 1) to be one of the leading (among 3) NBFC for consumer and small / medium business finance and service provider most reliable financial; 2) increase current assets under management nearly 3 times with accelerated growth and a calibrated underwriting approach; 3) bring about a 200-250 basis point reduction in the cost of funding; 4) Follow prudent provisioning and aggressive depreciation, thus managing net NPAs below 1%.

Basic strategic pillars establishing focused direction:

– New leadership to drive a new vision: Magma will be a professionally managed organization under a new leadership team supported by the existing leadership. With a capital increase of Rs 34.6 billion, Magma Fincorp is now a subsidiary of Rising Sun Holdings Private Limited (owned and controlled by Mr. Adar Poonawalla). Mr. Adar Poonawalla has been appointed as the new president and Mr. Abhay Bhutada, managing director. CEO Vijay Deshwal will join the first week of July 21. In addition, the nomination process is underway for 10-12 senior leadership positions including CXOs, Product Managers, Subject Matter Experts for Risk Analysis, Digitization, etc. The process of rebranding from Magma Fincorp under the Poonawalla brand is underway (RBI approval for the name change has been received).

– Capital buffer and parentage to improve the credit rating outlook: the equity injection led to a sharp increase in the level 1 ratio to 66.8%, with a leverage effect of only 1.3x. The advantage of a large capital base and a more solid parentage will lead to a reduction in financing costs.

– Product strategy to realign: the company will realign its product strategy and geographic strategy on certain consumer and small / medium business segments with an emphasis on healthy IRR, RaRoC and cross-selling opportunities. It will soon add personal loans, business loans, SME LAPs, non-affordable home loans to its existing product mix of used car finance, business loans, affordable loans and small LAPs. By March 22, it will also look to venture into co-branded credit cards, consumer durables, EMI cards, medical equipment, cash advances to merchants and insurance cross-selling.

– Streamline the network and improve operational efficiency: The company will focus on streamlining its existing network of 297 branches through the prism of branch level profitability, distribution capabilities for the revised product suite and the new localization strategy. It will invest in building alliances with pan-Indian players to ensure a reduced acquisition cost, stable volumes and contextual loans. It will also increase dependence on the influencer network in all product segments. Emphasis will be placed on increased use of technology and digital payments to optimize the efficiency of distribution and collection.

– Improve risk management, data analysis and digital capabilities. The company is looking to expand its technological capabilities with an additional technology center in Pune, which will be the backbone of all technology-related requirements and support for the business. It would also build a strong analytical team, focused on delivering a targeted value proposition to customers and generating cross-selling opportunities. He will invest heavily in building the direct acquisition channel via the digital channel to ensure that customer ownership and connection is maximized. He will follow an integrated approach to customer service management with “Do It Yourself” solutions to ensure customers have the best experience in their class. It will also deploy a state-of-the-art contact center to support the digital acquisition channel and improve conversion efficiency.

Magma Housing – equity injection to consolidate equity for accelerated growth: Magma Housing also reported a loss due to a one-time write-off of Rs58mn and an additional buffer of Rs440mn. With this, Magma carries a provisioning coverage of 2.8% on stage 1/2 assets and 52% for stage 3 assets. In addition, the AUM of housing finance has increased by more than 20%. with a cash outflow IRR of 13.6% which supported a stable operating profit of Rs 500 million in the fourth quarter of FY21 (Rs 1.44 billion in FY21). Magma Fincorp injected Rs 5 billion of equity into Magma HFC, bringing the net worth of HFC to Rs 10 billion. Statutory approvals have been received for the name change to Poonawalla Housing Finance. After experiencing a 30% CAGR growth over the past 3 years, Capital Injection is expected to further accelerate growth with lower financing costs and an expansion of the customer base.

Magma HDI Fundraising to Accelerate Growth: Magma HDI has announced a fundraising operation of 5.25 billion rupees at a pre-monetary valuation of 12 billion rupees. This includes new capital of 2.5 billion rupees by ICICI Ventures, Morgan Stanley PE Asia and the secondary sale of 2.75 billion rupees by the Magma Fincorp group to ICICI Ventures, Morgan Stanley PE Asia, Cyza Chem Pvt (a company of the Poonawalla group) and two family offices. .

Shares of MAGMA FINCORP LTD. was last trading on BSE at Rs.150.2 from the previous close of Rs. 143.05. The total number of shares traded during the day was 66,968 in more than 265 trades.

The stock hit an intraday high of Rs. 150.2 and an intraday low of 150.2. The net turnover during the day was Rs. 10,058,593.

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