A change of guard at Magma Fincorp, with Adar Poonawalla-controlled Poonawalla Finance acquiring 60% stake in the former, could turn around fortunes of the West Bengal-based non-banking financial company (NBFC), which has been struggling to keep its finances in check, say analysts.
With Poonawalla taking control and fortunes of Magma Fincorp (MFL) expected to change, investors rushed to buy the latter's shares which were locked in the 10 per cent upper circuit band at Rs 93.4 apiece on the BSE – also its 52-week high. From its 52-week low of Rs 12.7, hit on May 28, 2020, the stock rose a whopping 554% till Wednesday, BSE data shows. In comparison, the S&P BSE Sensex has advanced 60% during the period. In February alone, MFL has more than doubled from Rs 45.1.
The deal
On Wednesday, MFL informed the exchanges that Adar Poonawalla-controlled Rising Sun Holdings will acquire a 60% stake in MFL by subscribing to a Rs 3,456-crore preferential issue. Along with the fund infusion and deal completion, the existing financial services business of Poonawalla Finance would be consolidated into Magma Fincorp. Poonawalla Finance is an existing finance company owned by the Poonawalla family, which owns and controls Serum Institute of India. The final financial entity will be called Poonawalla Finance.
“As part of the deal, MFL will allot 458 million shares to Rising Sun Holdings, and 35 million shares to Sanjay Chamria and Mayank Poddar (MFL promoters),” Magma and Poonawalla Finance said in a joint statement. Rising Sun Holdings will hold 60% in larger entity, and the existing promoter group stake will get reduced to 13.3%. The net worth of MFL will increase to over Rs 6,300 crore, the statement added.
Besides, Adar Poonawalla would be appointed as the chairman while Abhay Bhutada, presently managing director and CEO of Poonawalla Finance would be the managing director. Sanjay Chamria would continue as the executive vice-chairman of MFL.
The road ahead
“The new promoter and management will leverage Magma’s niche products, geography and customer franchise to improve its market positioning and capitalise on upcoming growth opportunities in its various operating segments,” notes Kunal Shah, research analyst at ICICI Securities, in a co-authored note with Renish Bhuva and Chintan Shah.
Further, the preferential issue under the deal would enhance MFL's capital adequacy to 68% post deal completion.
At the end of FY20, MFL’s net worth stood at Rs 2,748 crore with nearly Rs 15,240 crore worth of total assets. Prior to the deal, total assets were expected to grow to Rs 18,222.4 crore by FY23.
In the December quarter of FY21, Magma reported a profit before tax (PBT) of Rs 17 crore compared with a PBT of Rs 30 crore clocked in Q3FY20. Its AUM declined from Rs 16,574 crore to Rs 15,006 crore during this period. Net interest margins (NIM) and collection efficiency, however, improved to 8.5% (from 7.7% in Q3FY20), and 94% in December, 2020 (from 90% in November 2020).
“While the company delivered a decent set of results amid challenging environment, expansion in NIMs, improved collection efficiency at 97% in January, and asset cover of 5.3% provides comfort,” said analysts at Phillip Capital in a result-review report. The brokerage, which maintains its ‘Buy’ call on MFL with a target of Rs 95, says, as the share of focus products continue to rise, NIMs, credit cost and profitability will get further fillip.
Apart from the financial boost, ICICI Securities believes that joining hands with Poonawalla Finance will help MFL leverage the operational synergies and lower operating costs due to the former’s digital expertise.
“Competitive positioning of the entity will be enhanced to tap better quality customers, leading to a structural improvement in operating metrics and consequently better return profile... This infusion would also enable Magma Fincorp to further invest in its housing finance subsidiary and general insurance joint venture, as required,” the brokerage noted. ICICI Securities, too, has a ‘Buy’ on the stock with a target price of Rs 125.
That said, clarity on further business strategy post the takeover remains under watch for some analysts.
Emkay Global, for instance, remains concerned about the company’s overall asset quality profile, considering elevated credit costs at 350 basis points during Q3FY21 as well as proposed restructured book of 5-6 per cent of AUM.
“We await more clarity regarding the future business strategy of the new promoter group and their preferred areas of growth. Poonawalla Finance is already engaged in personal and business loans. We await clarity over the new business avenues as well,” it said.
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