Magma Fincorp started operations over two decades ago. The company provides a bouquet of financial services products including vehicle finance, agri finance, SME finance and mortgage finance and has a general insurance joint venture. Magma with a focus on Rurban sector (rural and semi-urban) has widespread coverage through 228 branches and presence across 1,600 talukas and 2,900 locations. Magma has a dedicated base of around 6.5 lakh plus "active customers" and manages a loan book of about Rs 18,812 crore.
Replying to IIFL’s Priyanka, he said, “GST will have short term, may be a 1-2 quarter impact on SME business and that the company expects it to be a long term positive.”
You have realigned your product portfolio towards higher margin products. So what percentage of your loan book in FY18E & FY19E would come from higher margin products as it was 58% in FY16?
Risk adjusted higher ROA products, including used assets, tractors, SME and mortgage, contribute 62% of our loan book as on Jun’17. With an objective to diversify our vehicle financing book to reduce cyclicality and seasonality, we intend to increase contribution of used assets and LCV/SCVs in our loan book. We believe the overall contribution of higher RoA products will remain in the range of 60-70% over coming years.
How much loan book growth are you aiming for next couple of years? What will be the principal reasons for this growth?
Our overall strategy is that we give priority to asset quality over growth. With improving asset quality during FY18, we expect our overall AUM to register a positive single digit AUM growth in FY18 compared to a decline in AUM in last 3 years. We would expect the AUM growth to pick from FY19 and move to double digit growth.
What NIMs are you targeting over next couple of years? And what factors would contribute towards NIM's increment?
We reported best ever margin of 8.4% in 1Q FY18. Decline in cost of funds and non-performing loans led to this improvement of margin. We acknowledge there is further scope in improving our margins as there is head room available in reducing cost of funds. Further, the improving asset quality will also contribute in the margin expansion.
What were your collection days in FY17 and what is the target for FY18E & FY19E? Can we see faster upgradation and recoveries in the coming period?
Our collection efficiency in 1Q FY18 was 96.6%. With improvement in macros fundamental of rural economy and tighter internal processes, we expect collection efficiency in FY18 to be better than FY17.
The company’s GNPA in FY17 has improved to 6.7% from 8.1% in FY16. Are you aiming further improvement going ahead? What PCR one should expect for FY18E & FY19E?
We have taken series of measures to continually improve portfolio quality and it is reflected in the marginal reduction in the absolute amount of NNPA during the quarter. We have also mentioned that the book originated under the Branch banking structure since December 2015 is significantly superior to the book originated earlier to that period. This book now comprises over 55% of our total book (45% as on March 31, 2017). We are, therefore, confident that our NPAs have peaked and we should progressively lower NPA numbers going forward.
PCR is a function of which bucket the portfolio is in. Since we have sold our entire higher bucket portfolio, PCR is low. We are entirely focused on reducing our level of NNPA.
Can you give us more color on your credit cost in FY17 and how much you are aiming for FY18E & FY19E?
With an improvement in the asset quality, we expect credit cost to reduce in coming quarters.
What is the RoA one should expect for next couple of years and the drivers that would drive it?
ROA in 1Q FY18 improved to 1.34% on back of better operating performance. Entire management team now has priorities on improving the operating metrics with first focus on asset quality. With this, we are confident that we will see further expansion in ROA in coming quarters.
Are you planning to raise further capital in order to align with your growth plans?
With CAR of 21%, the company is well capitalized and has no plans to raise capital in immediate future.
How will GST affect business of the company?
Among the loan products which Magma’s offer, the segments which would be most sensitive to GST will be SME & MHCV loans. GST will have short term, may be a 1-2 quarter impact on SME business, we expect it to be a long term positive. Even in short term, Magma’s SME business will not be impacted much compared to others because in this business we target only those SME customers whose turnover is more than Rs 1 cr, which are either central excise or service tax compliant. In other worlds, most of current SME customers are more formal and hence we expect them to be least impacted. To address this issue further, we have conducted a study in collaboration with one of the leading rating agency to understand the industries which will be positively and negatively impacted in GST regime. Accordingly, we in this year would be focusing on the industries which are positively impacted by GST and would have tighter screens for the industries which are negatively impacted.
MHCV’s sales are expected to be impacted in short to medium term with expected improvement in efficiencies in long haul logistic sector. However, Magma is defocusing on this segment over past few years and hence we don’t expect any significant impact of it on our business. While under GST regime the demand for SCV/LCV will increase (due to development of hub & spoke model of transportation), and these being our focus products, would be to our advantage.