CRISIL has reaffirmed its short-term rating of 'CRISIL A1+' on the commercial paper programme of Magma Housing Finance Limited (Magma). Based on the request by Magma, CRISIL has also reduced the quantum of rated commercial paper to Rs 100 crore from Rs 400 crore. As on date, Magma does not have any outstanding commercial paper.
 
The rating continues to reflect the group's diversified business risk profile with presence across retail financing asset classes, and adequate capitalisation. These strengths are partially offset by average asset quality and modest earnings profile.
 
On the liability side, the Reserve Bank of India (RBI) announced regulatory measures under 'Covid-19 - Regulatory Package', whereby lenders were permitted to grant moratorium on bank loans. Magma group has not applied for moratorium and is repaying its liabilities as per schedule.
 
Herein, CRISIL believes that Magma group has sufficient liquidity, to manage this period wherein asset-side collections will be significantly lower while liability-side outflows continue as per schedule. Magma group's liquidity buffer to cover total debt and loan repayments till June 2020 was over 3.6 times. Further, in terms of liquidity, Magma group, as on March 31, 2020, had liquidity of Rs 1765 crore (Rs 250 crore of cash and equivalents, Rs 1269 crore of unutilised CC/WCDL lines and term loans of Rs 245 crore from PSU bank and NHB which got disbursed in Apr-20). Against the same, they have total debt payments of Rs 255 crore (excluding Rs 238.5 crore of CC line which is in advanced stage of renewal) over the next three months till end June 2020.
 
During fiscal 2015 and 2016, Magma faced asset quality challenges as its 90+ dpd stood at 9.8% and 11.6% as on March 31, 2015 and March 31, 2016, respectively. Post which, the group focused on strengthening internal systems and processes by taking multiple initiatives such as use of digital means for sourcing, using data analytics to monitor and track delinquency metrics, cheque bounce rates, and improve collection process. Furthermore, the group had explicitly outlined focus areas as high, medium, and low with respect to the product segments it operates in. The increased focus on direct sourcing, branch-wise grading based on performance, and collections also led to gradual improvement in asset quality as 90+ days past due (dpd) improved to 8.6% as on March 31, 2018, and 4.8% as on March 31, 2019. However, a significant part of the improvement was driven by write-offs of around Rs 673 crores in fiscals 2018 and 2019. After considering the write-offs, the 90+dpd remained high at 7.2% as on March 31, 2019, although improved from 10.2% as on March 31, 2018. Over the first nine months of fiscal 2020, Magma has reported an increase in 90+ dpd to 6.7% as on December 31, 2019 and 8.7% after including write-offs done in first nine months of fiscal 2020.
 
Going forward, amidst the nationwide Covid-19 linked lockdown and challenging economic environment, collections and asset quality metrics could come under pressure. In vehicle finance segment, the borrowers of the company are primarily individual small road transport operators whose truck utilisation and income streams are more vulnerable to weak economic activity. In other segments, the group largely caters to self-employed customers who are among the most vulnerable to lockdown and its implications given the non-regular income pattern and lack of financial flexibility. Furthermore, with a significant impact on the business operations of the underlying borrowers, a large proportion of the customers have opted for moratorium. As and how the lockdown is lifted and the time taken for the borrowers operations to return to normalcy is a key monitorable. Additionally, any change in the fundamental behaviour of the borrower which could result in depletion of the ability of Magma group to recover is also a key monitorable.    
 
Earnings profile too as measured by return on managed assets (RoMA: profit after tax by total assets + securitisation) witnessed deterioration to 0.5% (annualised) in nine months ended December 2019 from 1.8% in fiscal 2019 due to increased credit cost and cost of borrowings.  In order to improve its earnings profile, the group is taking steps which are a combination of focus on higher-yielding product segments like used assets and SME loans as well as reduction in credit costs. Amidst the economic environment and higher slippages, the company continues to write off aggressively at around Rs 323 crore in first nine months of fiscal 2020. Due to the challenging funding situation and substitution of short term liabilities with long term borrowings, borrowing costs had risen till Q2-FY'20, but reduced in Q3-FY'20. On the other hand, a significant portion of the loan book has fixed rate and repricing of floating rate assets will happen with a lag. Consequently, profitability is expected to not materially improve over the medium term, despite the portfolio scale-up and benefits from operating leverage. In the wake of Covid-19 and lockdown, ability to improve net interest margins and keep credit costs under control will remain a key rating monitorable.
 
Despite expected pressure on earnings profile because of higher credit costs, CRISIL does not envisage any impact on capitalisation metrics. The company's adjusted gearing was comfortable at 5.2 times as of December 31, 2019. CRISIL expects gearing to be maintained as the company will focus more on collections and is not likely to grow the book significantly over the next six months.

To arrive at its ratings, CRISIL has combined the business and financial risk profiles of Magma Fincorp Ltd (Magma Fincorp; 'CRISIL A1+') and Magma Housing Finance. These companies, together referred to as the Magma group, have common senior management team and integrated operations, and are strategically important for business growth.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Strengths
* Diversified business risk profile with presence across the gamut of retail financing asset classes
The Magma group is among the established non-banking financial companies (NBFCs) with a track record of over 30 years and presence in 21 states through 326 branches. On account of increasing delinquencies, there was a reduction in the portfolio size from fiscals 2016 to 2018. However, after 3 years of de-growth, the company reported a positive annual growth of 8% in fiscal 2019 and the portfolio stood at Rs 17,029 crore as on March 31, 2019. As a part of the learnings from the phase of de-growth, the group has implemented several changes in internal processes to support growth over the medium term. The group plans to adopt technology as a major business driver to improve employee productivity and reduce turnaround time for loan disbursals. The group has classified its loan products into high, medium, or low focus areas based on an analysis of its internal product performance data for the past 10 years. The product grading is an ongoing process and is modified based on the macro-economic trends in the economy. Currently, based on this analysis, the group has increased focus on higher-yielding products such as home loans, used assets, and SME (small and medium enterprise) loans; while reduced focus on commercial vehicles, construction equipment, tractor loans and loans against property. It has also taken steps to tap the business potential of cross-selling home loans to its existing vehicle finance customers. However, amidst the market environment, the group's AUM de-grew by 3.6% (annualised) in first nine months of fiscal 2020 to reach Rs 16,574 crore as on December 31, 2019. Growth momentum is expected to be subdued over the medium to long term amidst the implications of the Covid-19 linked lockdown.
 
Nevertheless, as on December 31, 2019, the portfolio is well diversified across product segments with no product constituting more than 30% of the total portfolio. The group has a significant presence in the used and new passenger car and utility vehicle finance segment (30% of the total portfolio), where it mainly caters to the self-employed and commercial-operator segments. It also provides new and used construction equipment and commercial vehicle (24%) loans to small entrepreneurs and road transport operators, a significant proportion of who are first-time buyers and Tractor Loans (11%). The group is also increasing its presence in the mortgage loan segment (23%) and SME financing (12%).
 
* Adequate capitalisation
Capitalisation is adequate with a reported networth of Rs 2,775 crore as on December 31, 2019 (Rs 2,744 crore as on March 31, 2019). Adjusted gearing (on-book borrowings + off book (securitistaion) divided by networth) also remained comfortable at 5.2 times as on December 31, 2019. Capital position of the company remains adequate as the group has demonstrated its ability to raise capital at regular intervals with the last capital raise of around Rs 500 crore in fiscal 2019.  Consequently, at standalone level, capital adequacy ratios also remained comfortable with Tier 1 and CAR at 25.3% and 31.7%, respectively, as on December 31, 2019. CRISIL expects gearing to be maintained as the group will focus more on collections and is not likely to grow the book significantly over the near to medium term.
 
* Experienced and competent management team
The group is making significant investments in people, infrastructure, systems, and processes to support growth. Over the past three fiscals, it has hired experienced professionals as the second line of management, including a chief risk officer. These senior management personnel have been in the industry for more than a decade, and have extensive experience in their functional areas.
 
Weaknesses
* Average asset quality
During fiscal 2015 and 2016, Magma faced asset quality challenges as its 90+ dpd stood at 9.8% and 11.6% as on March 31, 2015 and March 31, 2016, respectively. Post which, the group focused on strengthening internal systems and processes by taking multiple initiatives such as use of digital means for sourcing, using data analytics to monitor and track delinquency metrics, cheque bounce rates, and improve collection process. Furthermore, the group had explicitly outlined focus areas as high, medium, and low with respect to the product segments it operates in. The increased focus on direct sourcing, branch-wise grading based on performance, and collections also led to gradual improvement in asset quality as 90+ days past due (dpd) improved to 8.6% as on March 31, 2018, and 4.8% as on March 31, 2019. However, a significant part of the improvement was driven by write-offs of around Rs 673 crores in fiscals 2018 and 2019. After considering the write-offs, the 90+dpd remained high at 7.2% as on March 31, 2019, although improved from 10.2% as on March 31, 2018. Over the first nine months of fiscal 2020, Magma has reported an increase in 90+ dpd to 6.7% as on December 31, 2019 and 8.7% after including write-offs done in first nine months of fiscal 2020.
 
Going forward, amidst the nationwide Covid-19 linked lockdown and challenging economic environment, collections and asset quality metrics could come under pressure. In vehicle finance segment, the borrowers of the company are primarily individual small road transport operators whose truck utilisation and income streams are more vulnerable to weak economic activity. In other segments, the group largely caters to self-employed customers who are among the most vulnerable to lockdown and its implications given the non-regular income pattern and lack of financial flexibility. Furthermore, with a significant impact on the business operations of the underlying borrowers, a large proportion of the customers have opted for moratorium. As and how the lockdown is lifted and the time taken for the borrowers operations to return to normalcy is a key monitorable. Additionally, any change in the fundamental behaviour of the borrower which could result in depletion of the ability of Magma group to recover is also a key monitorable.    
 
Nevertheless, the group has strengthened internal processes, such as using a credit engine for underwriting. This has been developed based on the trend analysis of past data. The process uses machine learning to constantly update the trends. It is also used for grading products into favourable and unfavourable, and has increased rejection rates by 10%. Additionally, the group has linked the sales team incentives to the early bucket collections. It has also started grading branches based on asset quality, which affects their funds available for disbursal and in turn the staff variable salaries at the branch. The group is also focusing on direct in-house sourcing than through direct sales agents (DSAs) to ensure better monitoring and control. The group has also devised a plan of action to tackle the situation of lock down and Covid 19 to manage its asset quality.  Nevertheless, the impact of nationwide lockdown due to Covid 19 on collections and its impact on delinquency levels remains to be seen and remains a key monitorable.
 
* Modest earnings
Return on managed assets (RoMA: profit after tax by total assets + securitisation), decreased to 0.5% (annualised) in first nine months ended December 2019 from 1.8% in fiscal 2019 due to increased credit cost and cost of borrowings.  In order to improve its earnings profile, the group is taking steps which are a combination of focus on higher-yielding product segments like used assets and SME loans as well as reduction in credit costs. Amidst the economic environment and higher slippages, the company continues to write off aggressively at around Rs 323 crore in first nine months of fiscal 2020. Having said that, the group has taken measures to reduce its credit costs as lately, it has been covering 100% of new underwriting for CV, CE, Used CV & CE and SME portfolio under CGTSME scheme. Due to the challenging funding situation and substitution of short term liabilities with long term borrowings, borrowing costs had risen till Q2-FY'20, but reduced in Q3-FY'20. On the other hand, a significant portion of the loan book has fixed rate and repricing of floating rate assets will happen with a lag. Consequently, profitability is expected to not materially improve over the medium term, despite the portfolio scale-up and benefits from operating leverage. In the wake of COVID 19 and lockdown, ability to improve net interest margins and keep credit costs under control will remain a key rating monitorable.

Consolidated ALM statement of Magma group as on December 31, 2019, shows some cumulative negative gap in up to 1 year bucket (excluding sanctioned unutilised bank lines). Furthermore, at a standalone level also, Magma Housing had cumulative negative gaps (excluding sanctioned unutilised bank lines). However, the mismatches in up to 1 year bucket has improved significantly from Mar-19.
 
The ALM gap is largely due to the high proportion of shorter tenure borrowings (less than 1 year original maturity), especially in the form of working capital demand loans and cash credit facilities. As on December 31, 2019, the shorter tenure borrowings including working capital limits, cash credit, and overdraft facility remained high at 25% of the total borrowings at consolidated level. Therefore, the ability of the company to regularly roll over / refinance its short term lines from banks is a key monitorable. The company is taking steps to further elongate the tenure of their borrowings by raising long term loans and debentures.
 
Further, in terms of liquidity, Magma group, as on March 31, 2020, had liquidity of Rs 1765 crore (Rs 250 crore of cash and equivalents, Rs 1269 crore of unutilised CC/WCDL lines and term loans of Rs 245 crore from PSU bank and NHB which got disbursed in Apr-20). Against the same, they have total debt payments of Rs 255 crore (excluding Rs 238.5 crore of CC line which is in advanced stage of renewal) over the next three months till end June 2020.
 
Rating Sensitivity Factors
Downward Factors
*Inability to improve asset quality metrics from current levels
*Profitability as measured by RoMA remaining below 1.5%
*Weakening of capitalisation metrics with adjusted gearing inching beyond 6.5 times
*Weakening of the ALM position of the company with negative cumulative mismatches in the upto 6 months bucket
 
About the Magma Group
Incorporated as Magma Leasing Ltd, Magma Fincorp commenced operations in 1989. The company is a significant player in the asset-finance business with loan AUM of Rs 16, 574 crore as on December 31, 2019. It has a significant presence in the passenger car and utility vehicle finance segment. It also provides construction equipment and commercial vehicle loans to small entrepreneurs and small road transport operators. The company has diversified its product offerings by financing tractors, pre-owned vehicles, providing mortgage finance, and lending to the SME sector.
 
In February 2013, Magma Fincorp acquired GE Money Housing Finance. Post-acquisition, the company was renamed Magma Housing Finance Ltd. Additionally, the Magma group acquired the home equity loan portfolio of GE Money Financial Services Pvt Ltd. Magma ITL Finance Ltd, incorporated in 2007 as an NBFC that was set up in joint venture with International Tractors Ltd (manufacturer of Sonalika tractors), has been merged with Magma Fincorp.

Any other information: Not applicable