Rating Rationale

Strengths
* Diversified business profile with presence across the gamut of retail financing asset classes
The group is among the established asset financing non-banking financial companies (NBFCs) with a sizeable presence in rural and semi-urban areas and a track record of over 25 years. It has a competitive market position with loan assets under management (AUM) of Rs 15,555 crore as on March 31, 2018. Its portfolio is diversified across product segments. It has a significant presence in the passenger car and utility vehicle finance segment (32% of AUM as on March 31, 2018), where it mainly caters to the self-employed and commercial-operator segments. It also provides construction equipment (9%) and commercial vehicle (8%) finance to small entrepreneurs and small road transport operators, a significant proportion of whom are first-time buyers. The group also has a considerable presence in tractor financing (18%) and has diversified into mortgage financing (17%), small and medium enterprise (SME) financing (13%), and used commercial vehicles financing. Though growth slowed in the past few years due to continued macroeconomic challenges, it is expected to revive from fiscal 2019 and loan AUM is likely to reach Rs 18,000 crore by March 2019. Higher yielding segments such as pre-owned vehicles, light commercial vehicles, SMEs, and affordable housing are expected to drive the growth in loan AUM over the next few years. The group is likely to benefit from its diversified product suite and large presence in rural and semi-urban areas and maintain its competitive market position over the medium term.

* Adequate capitalisation
Capitalisation is adequate with a adjusted networth of Rs 2093 crore as on March 31, 2018 (Rs 1919 crore as on March 31, 2017) against loan AUM of Rs 15,555 crore (Rs 16,101 crore). Tier-I and overall capital adequacy ratios (CARs) were moderate at 17.3% and 20.7%, respectively, as on March 31, 2018 (15.4% and 20.4%, respectively, as on March 31, 2017). CRISIL, in its analysis of capitalisation, factors in the total outside liabilities, including the extent of off-balance-sheet assigned or securitised loans, in addition to on-balance-sheet liabilities. External liabilities (including principal outstanding on off-balance-sheet securitisation and assignment transactions) declined to 6.4 times the networth as on March 31, 2018, from 7.4 times a year earlier. Magma Housing's networth, Tier-I, and overall CAR were adequate at Rs 288 crore, 28.3%, and 28.8%, respectively, as on March 31, 2018 (Rs 268 crore, 22.6%, and 23.2%, respectively, as on March 31, 2017). The group strengthened its capital position by raising equity of Rs 500 crore in the first quarter of fiscal 2019 to support growth plans. Capital position is expected to remain adequate over the medium term.

* Experienced and competent management team
The group is making significant investments in people, infrastructure, systems, and processes to support growth plans and has hired experienced professionals to head the asset-backed financing and mortgage financing businesses. Senior management personnel have been in the industry for more than a decade, and have extensive experience in their functional areas.

Weakness
* Average, albeit improving, asset quality
Gross non-performing assets (NPAs) stood at 7.0% as on March 31, 2018, against a comparable number of 8.8% as on March 31, 2017. The improvement in asset quality was driven by change in business model. The branch team is responsible for both origination and collection up to 60 days past due in the asset financing business. Sale of distressed assets to asset reconstruction companies (ARCs) at the end of fiscal 2017, along with favourable monsoon, resulted in higher recovery from loans overdue by more than 60 days. Delinquencies in SME and mortgage financing businesses remained stable through fiscal 2018. Asset quality should improve over the medium term, considering the better performance of loans originated under the revised business model. Asset quality in the SME and mortgage financing businesses, nevertheless, remains a monitorable, given the low seasoning of these loans.

* Modest, albeit rising, earnings
Return on managed assets (RoMA¹), at 1.3% for fiscal 2018, was lower than the industry average of 1.8%. However, it has improved significantly from 0.9-1.0% in the past few years, driven by an increase in net interest margin following an increase in proportion of high yielding assets and reduction in slippages to NPAs. Credit cost has reduced considerably following a reduction in gross NPAs. Operating expense as a percentage of loan AUM, however, increased on account of additional investments in people, processes, and infrastructure for growth and marginal reduction in loan AUM. Profitability is expected to improve over the medium term with increase in revenue and better operating efficiency. Ability to improve profitability to the industry average level by maintaining net interest margin at the current level and keeping credit cost under control remains critical and is a key rating monitorable.