A good match

PENNY WISE

The merger of Shrachi Infrastructure Finance will provide a leg-up to Magma Leasing's geographical spread and asset size.

While finance minister P Chidambaram is urging the banking industry to adopt the consolidation mode to achieve global scale and size, non banking finance companies (NBFCs) are quietly stalking Deal Street to prepare for competition by way of mergers and acquisitions.

The Shriram group has consolidated three group companies in one arm, and more recently, Kolkata-based Shrachi Infrastructure Finance was merged with Magma Leasing.

Analysts also approve of the merger given the consequent bargaining power of Magma to raise resources and leverage on its diversified branch location.

The merger of Shrachi with Magma Leasing is beneficial as the combined entity's asset size will bulge to over Rs 4,500 crore along with a pan-India presence and a customer base of about 1.5 lakh. With this merger, Magma has achieved geographical spread and size and scale of business""one of the prerequisites to survive in the competitive financial services world. 
 

PERFECT PAIR
FY06 (Rs crore)	Magma	Shrachi	Combined enitty	% chg *
Disbursements	1820.00	702.00	2522.00	38.57
Asset base	3334.00	1250.00	4584.00	37.49
Revenues	1515.80	320.50	1836.30	21.14
PAT	201.70	59.10	260.80	29.30
* The figures are change over standalone Magma Leasing

Magma Leasing has 68 branches in 17 states mostly in semi-urban and rural areas in the North and East. The branch network of the merged entity will more than double to 146 branches across 20 states.

Further, the merger complements its regional presence as Shrachi has strong presence in south and east while it is planning to deepen its reach in the west. 
 

SPREADING ITS WINGS
Business profile	Magma	Shrachi
Years of experience	17.00	18.00
Regional Presence	North and East	South and East
Areawise presence	Semi urban, rural	Semi urban,  rural
Branches	68.00	78.00
No of states	16.00	14.00
Employee base	1500.00	789.00

Further, the product portfolio of the merged entity will also widen with Shrachi's products like commercial vehicle (CV) financing, two-wheeler (2W) and three-wheeler (3W) loans supplementing Magma's product portfolio of CVs (old and new), cars and utility vehicles, and construction equipment finance.

Says Anjan Mitra, chief financial officer, Magma Leasing, "Together Magma Shrachi Finance (the new name of the company) will be able to realise our vision of becoming India's largest retail financing company."

The company now hopes to achieve better productivity or sales per branch. Says an analyst from a leading broking firm, "The merger augurs well as the growth opportunity will be much higher due to the current smaller size."

Nevertheless, analysts expect pressure on margins due to rising cost of funds and competition from banks, other NBFCs and even local moneylenders. However Mitra has a different view.

"Though interest rates have risen, we have been able to maintain our spreads and will continue to do so by changing our product mix by including high yielding second hand CV financing and passing the high costs to consumers wherever possible."

The company will now have better bargaining power due to its balance sheet size getting larger leading to lower cost of funds. Also, better access to untapped markets will increase returns, which will improve net interest margins (NIMs) of about 13 per cent.

Despite its client base originating from semi-urban and rural areas, the company has zero non-performing loans. Higher NIMs, growth in top line and bottom line means a stronger balance sheet. Also, about 80 per cent of its assets are securitised, so the balance sheet is kept lean.

Magma is also trying to beef up its fee based activities and targets to increase its contribution to total income through distribution of other financial products.

The company has tie-ups with various leading insurance players like Oriental Insurance, Reliance General Insurance, ICICI Lombard and National Insurance for distribution of their products which is an extension to its main business. Also, it is a distribution agent of personal loans.

The Indian commercial vehicle industry""the main product segment of the combined entity""has had a great time in the first half of this year, growing at 40 per cent year on year (y-o-y).

Both on a standalone basis, Magma and Shrachi have both recorded an annualised growth of over 60 per cent each during the past five years albeit on a lower base. Going forward, the company has targeted to maintain a growth of 35-40 per cent in the next two-three years on a higher base.

The company has also started financing pre-owned CVs as it thinks that the borrower profile gels well with its market segment. It has targeted the share of second hand CV financing to be in the range of 35-40 per cent in the total CV portfolio.

Further, it also expects the share of construction equipment finance to rise a bit and cars to decline as a percentage of its assets. The company recently tied up with car leader Maruti Udyog to finance its cars, which will support its car financing business where it faces competition from banks.

In its other business segment, Magma sees little competition from banks due to its presence in semi-urban and rural areas unlike cities and towns in case of latter.

The merger, which is effective from April 2006 is not yet approved by the shareholders and the company expects it to be completed by April 2007. One equity share of Magma will be issued against 3 shares of Shrachi, which will dilute the former's equity by 19 per cent.

In Q1FY07, Magma reported robust growth of 43 per cent and 31 per cent y-o-y in net interest income and net profits to Rs 315.7 crore and Rs 110.3 crore respectively though other income declined by 12 per cent to Rs 21.1 crore.

However at the current price of Rs 171, analysts feel that the positives of the merger seems to be priced into the stock given the valuation of 1.6x and 1.4x for FY07E and FY08E estimated book value respectively.