Poonawalla's buyout to aid Magma Fincorp's expansion plans: 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

A change of guard at Magma Fincorp, with Adar Poonawalla-controlled Poonawalla Finance acquiring 60 per cent stake in the former, could turnaround fortunes of the West Bengal-based non-banking financial company (NBFC), say analysts.

Not surprising then, investors rushed to buy MFL shares which were locked in the 10 per cent upper circuit band at Rs 93.4 on the BSE – also its 52-week high. From its 52-week low of Rs 12.7, hit on May 28, 2020, the stock is up 635 per cent, BSE data show. In comparison, the S&P BSE Sensex has doubled during the period. In February alone, MFL has more than doubled from Rs 45.1.

The deal
 

On Wednesday, MFL said Adar Poonawalla-controlled Rising Sun Holdings will acquire a 60 per cent in MFL by subscribing to a Rs 3,456-crore preferential issue, triggering an open offer for 26 per cent. Also, the existing financial services business of Poonawalla Finance would be consolidated into MFL. 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 (existing board members),” MFL and Poonawalla Finance said in a joint statement.

Thus, MFL will issue a total of 493.7 million shares, implying an average price of Rs 70 per share - a nearly 34 per cent discount to Dec’20 book value of Rs 106. MFL’s total share capital as of Dec’20 stood at around Rs 2,860 crore, which would rise to Rs 6,300 crore (post allotment) - a proposed dilution of 65 per cent of enhanced capital, the statement added.

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.

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 growth opportunities,” note analysts at ICICI Securities.

Further, the preferential issue under the deal would enhance MFL's capital adequacy to 68 per cent. 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, analysts were estimating total assets to grow to over Rs 18,000 crore by FY23.

In the December quarter of FY21, MFL reported a pre-tax profit (PBT) of Rs 17 crore compared with a PBT of Rs 30 crore a year-ago. Its AUM declined from Rs 16,574 crore in Q3'FY20 to Rs 15,006 crore during this period. Net interest margins (NIM) and collection efficiency, however, improved to 8.5 per cent (from 7.7 per cent in Q3'FY20), and 94 per cent in December, 2020 (from 90 per cent in November 2020) respectively.

“While the company delivered a decent set of results, expansion in NIMs, improved collection efficiency at 97 per cent in January, and asset cover of 5.3 per cent provides comfort,” said analysts at Phillip Capital in a result-review report. The brokerage maintains its ‘Buy’ call on MFL with a target of Rs 95.

That apart, ICICI Securities expects MFL operating costs to decline due to Poonawalla Finance’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 an overhang.

Emkay Global, for instance, remains concerned about MFL's overall asset quality profile, considering elevated credit costs at 350 basis points during Q3FY21 and 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,” it said.