BWI: Brickwork Ratings Assigns “BWR AA-” for Magma Fincorp Limited’s Unsecured Perpetual Debt Instruments (PDI) Issue of INR 40 crore or INR 400 million

Press release from Business Wire India
Source: Brickwork Ratings
Tuesday, September 08, 2009 10:50 AM IST (05:20 AM GMT)
Editors: General: Consumer interest, Economy; Business: Advertising, PR & marketing, Banking & financial services, Business services, Financial Analyst, Stock exchanges
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Brickwork Ratings Assigns "BWR AA-" for Magma Fincorp Limited's Unsecured Perpetual Debt Instruments (PDI) Issue of INR 40 crore or INR 400 million
PDI Issue Rating: BWR AA- ; Outlook : Stable

Bangalore, Karnataka, India, Tuesday, September 08, 2009 -- (Business Wire India) -- Brickwork Ratings has assigned BWR AA- (Pronounced BWR Double A minus) for Magma Fincorp Limited's (MFL) proposed Perpetual Debt Instruments (PDI) issue of INR 40 crore or INR 400 million. Brickwork Ratings' 'BWR AA-' stands for an instrument that is considered to offer HIGH credit quality / safety in terms of timely servicing of principal and interest obligations. The rating takes into account MFL's strong business model with clear focus on untapped rural/semi-urban markets, its proven track record in asset financing, its wide network of field staff across 21 states and the resultant well diversified portfolio de-risked across geography and products and comfortable capital adequacy.

Magma Fincorp Limited (formerly Magma Leasing Limited) was incorporated in 1988 and commenced operations in 1989. It is a Kolkata based NBFC promoted by Mr. Mayank Poddar who is the Chairman of the company. They offer the following products:

-- Commercial Vehicle Finance
-- Construction Equipment Finance
-- Car and Utility Vehicle Finance
-- Suvidha Loans (Refinance)
-- Strategic Construction Equipment Finance
-- SME Loans
-- Insurance

BWR has essentially relied upon the audited financial reports and the projected financial figures, information and clarification provided by MFL.

MFL has posted a modest growth in the total business of 32.67% in FY09, with improvement in quality of loans during FY-09 in spite of adverse circumstances. However, its net profit declined by 24% in FY 2009, mainly on back of higher interest costs.

Considering the fact that it essentially caters to the small and medium class borrowers in semi-urban and rural areas, MFL's asset quality is very good. During FY-09, MFL's write-offs were 1.42% as compared to 1.73% in 2008, which is a drop of 31 bps despite the challenging economic conditions. Its gross NPA and net NPA were nil because as a part of prudential financial management, all contracts with 180 days past dues are treated as loss assets and are written off. This is in accordance with the internationally accepted accounting principles on revenue recognition, provisioning & asset classification which stipulate de- recognition of income on 90 days past due, progressive provisioning and recognition of contracts with 180 days past dues as loss assets. These principles are more stringent than the guidelines prescribed by the Reserve Bank of India for compliance by the finance companies.

Financial Analysis

MFL has increased its total income in FY2009 by 32.67% but their PAT dropped from Rs. 614 million in FY08 to 469 million in FY09. The interest expense rose by 67% during the same period which contributed mainly for the drop in PAT. The cost of funds has increased by 155 bps during FY09, narrowing the spreads. RoA was reduced to 1.26% in FY09 from 2.09% in FY08. However, during this challenging year for the industry, their asset quality has improved, as write-offs reduced from 1.73% in 2008 to 1.42% in 2009. Their capital adequacy ratio has also improved from 15.3% to 17.3% during the same period.

Management of Risk:

MFL has an adequate risk management system in place, duly approved by its board to take care of credit, market, and operational risks. The board periodically reviews the same. Accordingly it has put in place, an appropriate machinery to identify measure, monitor and control the overall level of risks undertaken. The company has put in place Asset Liability Committee, Audit Committee and Risk Management Committee comprising of senior management personnel from different functional areas, which report to the Board at regular intervals.

Rating Outlook:

MFL has, since inception, concentrated on semi-urban and rural areas, where competition is relatively low. Besides the prudential financial management whereby all contracts with 180 days past dues are treated as loss assets and are written off, it has an in house credit operations and recovery team with dedicated field staff of the company leading to lower NPAs and high collection efficiencies. It has suitably leveraged the knowledge and experience of being in asset financing business for more than a decade, to generate high quality assets. Maintaining this quality of its assets is vital for the sustainability of its business. The rating also draws comfort from its capital adequacy ratio which is currently at 17.3%. The key risk-factors are its funding mix with reliance on short-term borrowings and intense competition in asset financing business leading to thin margins.

Copyright ©, 2009, Brickwork Ratings.

Brickwork Ratings has assigned the rating based on the information obtained from issuer and other reliable sources, which are deemed to be accurate. Brickwork has taken considerable steps to avoid any data distortion; however, it does not examine the precision or completeness of the information obtained. And hence, the information in this report is presented "as is" without any express or implied warranty of any kind. Brickwork does not make any representation in respect to the truth or accuracy of any such information. The rating assigned by Brickwork should be treated as an opinion rather than a recommendation to buy, sell or hold the rated instrument and BWR shall not be liable for any losses incurred by users from any use of this report or its contents. Brickwork has the right to change, suspend or withdraw the ratings at any time for any reasons.


CONTACT DETAILS
Jubin Pandey, Lead Analyst Contact, Brickwork Ratings, 1-860-425-2742, jubin.p@brickworkratings.com
Praveen Prakash, Co-Analyst Contact, Brickwork Ratings, 1-860-425-2742, praveen.prakash@brickworkratings.com
Anitha G, Media Contact, Brickwork Ratings, 1-860-425-2742, media@brickworkratings.com
Ramaswamy Annam, Director - Business Development, Relationship Contact, Brickwork Ratings, 1-860-425-2742, ramaswamy@brickworkratings.com

KEYWORDS
CONSUMER, ECONOMY, MARKETING, BANKING, BUSINESS SERVICES, Financial Analyst, STOCK EXCHANGES

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