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Change in controlling stake, promoter and management – a welcome move

Magma Fincorp’s (Magma) proposal for change in controlling stake, new promoter and stronger management to Rising Sun Holdings (controlled by Mr. Adar Poonawalla) bodes well for an otherwise niche franchise that has been in transition for several years. Business reorganisation and consolidation phases have depressed the stock’s valuation for long. We expect the new promoter group and management to leverage the niche positioning of Magma’s product, geography and customer franchise to improve the group’s market positioning and capitalise on upcoming opportunities. We assign high probability of superior operating metrics and return profile in the medium term drawing comfort from strong corporate group backing, >68% CAR (post infusion), improved credit rating outlook, operational synergies and business competitiveness. This niche franchise can now command 1.5x post-transaction book value and we revise our target price to Rs125 (previously: Rs95). Maintain BUY. The deal is of course subject to regulatory approvals and execution remains a key monitorable.  Deal contours: Rising Sun Holdings Private Limited, a company controlled by Mr. Adar Poonawalla, will have a controlling stake in the company (60%) followed by an open offer. The transaction envisages a binding offer for infusion of Rs34.56bn through a preferential issue of 493.7mn equity shares at a price of Rs70 per share. Of this, 458mn shares will be issued to the new promoter, Rising Sun Holdings, and 35.71mn shares to the existing promoter group, Mr. Sanjay Chamria and Mr. Mayank Poddar. Rising Sun Holdings would also be classified as a promoter of the company, together with the existing promoter group. Rising Sun Holdings would hold 60.0% stake in the entity post issuance and the existing promoter group’s stake would get reduced to 13.3%.

* Consolidation and rebranding of the group: The deal is subject to approval from shareholders and the relevant statutory and regulatory authorities. Also, subsequent to the completion of the preferential allotment, the existing financial services business of Poonawalla Finance is proposed to be consolidated into Magma Fincorp subject to compliance with extant regulations. Magma Fincorp and its subsidiaries shall be renamed and rebranded under the brand name Poonawalla Finance.

* Board composition and management to change: Mr. Adar Poonawalla will be appointed as the chairman and Mr. Abhay Bhutada, presently managing director & CEO of Poonawalla Finance, as managing director. Mr. Sanjay Chamria would continue as the executive vice-chairman. The management team will be further strengthened through the appointment of a professional CEO & COO with substantial experience in running large financial services' businesses.

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