Small Cap Safe Stock - Magma Fincorp.

Magma Fincorp is one of the most diversified nonbanking finance companies (NBFC) in the country with a major presence in the eastern and northern India. Checkout this small cap growth stock to buy.

Starting with loans for purchasing construction equipment and commercial vehicles, Magma now offers full-range loans with focus on rural and semi-urban markets.Recently,the company has added new high-yielding products to its loan portfolio,which has given a thrust to its net profit. Though,it has grown at a higher rate than the average rate in the NBFC space,still its valuations are lower. This makes it an interesting bet for long-term investors.

Magma Fincorp is predominantly in the business of financing of construction equipment,passenger cars,utility vehicles and commercial vehicles (CVs).These categories accounted for 87% of disbursements of the company in the nine months ended December 2009.Of late,the company has ventured into high-yield segments,such as financing of used-CV,tractor and small and medium-term enterprises loan.The yield is high on such loans as other financers/lenders shy away from these markets,because any kind of credit appraisal is extremely difficult. The share of new categories in total disbursements stood at 13% for the nine months ended December 2009.

The management has indicated that the company aims at increasing the share of high-yielding products in the loan book,which will obviously give a boost to the company's bottom line.A presence in financing of various kinds of products differentiates Magma Fincorp from other companies in its industry,which are mostly operating out of their niche. It also helps in diversifying the business risk.The company has preferred lending partner agreement with various auto and equipment manufacturers,such as Tata Motors,Mahindra & Mahindra,Hyundai,Ashok Leyland,JCB and Eicher.These agreements make it easier for Magma to sell its loan offering to latter customers. For instance,Magma Fincorp finances 20% of construction equipment manufactured by JCB.Similarly,it finances 14% of equipment manufactured by Telcon,the construction equipment division of Tata Motors.

The company has 151 branches across 21 states. Its network is well spread in eastern and northern India and in some parts of central India.The company is looking to increase its presence in the western and southern India.A pan-India presence helps it to diversify business model.

The company has posted an impressive growth recently.Backed by a 19% growth in disbursements and 160 basis points improvement in net interest margin (NIM),the company's net profit grew by 145% in the December 2009 quarter.Its NIM stood at 5.6% in the quarter.At this level,its NIM is on the higher side compared to industry.NIM is the difference between borrowing rate and lending rate and is a measure of spread.


The stock has largely underperformed the benchmark Nifty index in the current rally. Since,the beginning of the current rally, the stock has shot up by 78%,while Nifty has almost doubled. Not only that,most appreciation has happened only in the past 2-3 months,which shows that the scrip was ignored by the stock market for a good part of the current rally.

However,the market now has realised the strength in company's fundamentals,as the stock has shot up 60% since the first week of January. The stock is trading at a price-to-earnings multiple (P/E) of 12,which is much lesser than the valuations of its peers in the NBFC space. A combination of lower valuations and high growth trajectory makes it a good stock to buy for long-term investment portfolio.
Source: ET Investors' Guide