Published on 20/02/2021 10:47:22 AM | Source: Emkay Global Financial Services Ltd

Update On Magma Fincorp Ltd By Emkay Global

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Change in control: Adar Poonawalla buys in

* Sale of controlling stake in Magma Fincorp by promoters through preferential issue: After attempting to revamp the business model for a couple of times in past few years, Magma Fincorp has finally signed a deal with Rising Sun Holdings, controlled by Adar Poonawalla, for a preferential issue of equity shares. The transaction will result in Rising Sun Holdings acquiring a controlling stake in Magma. This will also trigger an open offer (~26% of expanded equity) as per the public announcement made under SAST guidelines. Magma has already announced an open offer at Rs70 per share (equivalent to preferential allotment price). Post preferential issue, Rising Sun Holdings would be classified as promoter and Magma would be rebranded as Poonawalla Finance.

* Proposed allotment is at a discount to current book value: As part of the transaction, Magma has proposed to allot 458mn shares to Rising Sun Holdings and 35.7mn shares to existing promoters. Thus, Magma will issue a total of 493.7mn shares for a consideration of Rs34.6bn, implying an average price of Rs70 per share - a ~34% discount to Dec’20 book value of Rs106. Magma’s total share capital as of Dec’20 stood at Rs28.6bn, which would rise to Rs63bn (post allotment) - a proposed dilution of 65% of enhanced capital.

* Complete revamp of current holding structure with sharp reduction in free float: Magma’s current shareholding pattern indicates a 24.4% promoter stake and 75.6% remains free float; however, post preferential allotment as per the revised structure, new promoters (Poonawalla Finance) would hold a ~60% stake and ~13.3% would be held by existing promoters and free float would reduce to ~26.7%. The filing also proposes that post preferential allotment, the existing businesses of Poonawalla Finance would be consolidated in to Magma Fincorp.

* Change in top management along with focus on hiring professionals for running the show: The new promoter, Rising Sun Holdings, intends to nominate Poonawalla as Chairman and Abhay Bhutada, presently Managing Director and CEO of Poonawalla Finance, as Managing Director. Sanjay Chamria would continue as Executive Vice Chairman of the Board. Management team will be further strengthened through the appointment of professionals form the industry.

* Magma’s struggle over asset quality and liability franchise had been well known: Post the ILFS crisis, Magma Fincorp had been struggling to raise money from capital markets and their dependence on bank borrowings had been consistently increasing. Moreover, the volatile trends in asset quality (especially in vehicle finance) had kept the profitability under consistent pressure. This transaction would strengthen Magma’s overall capital position and would allow the company to realign its business as desired.

* Await for further clarity over future business strategy; keeping the stock ‘Under Review’ for now: The stock has seen a sharp up move recently; however, we remained concerned about the company’s overall asset quality profile, considering elevated credit costs ~350bps during Q3FY21 as well as proposed restructured book of 5-6% 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. We are keeping the stock under review for now and would update our numbers after a detailed discussion with management.


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