Magma Fincorp - Change in controlling stake, promoter and management - a welcome move - ICICI Securities

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.

- The way forward: Magma Fincorp has been going through a consolidation phase and the niche franchise has undergone several strategic revamps in the past several years. The new promoter and management (in stronger hands) 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.

- Firstly, the preferential issue would augment the company's net worth in excess of Rs63bn and enhance the capital adequacy to 68% post issuance.

- Magma has been at the receiving end of the liquidity crisis when risk aversion of banks and debt investors was at its peak, though it was gradually coming out of it. Backing of a strong corporate group with substantial fund infusion will likely have a positive impact on its credit ratings and contain the cost of funds.

- Poonawalla Finance's digital lending expertise will be leveraged to reap operational synergies and lower operating costs.

- 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.

Shares of MAGMA FINCORP LTD. was last trading in BSE at Rs.98.05 as compared to the previous close of Rs. 93.4. The total number of shares traded during the day was 10327 in over 39 trades.

The stock hit an intraday high of Rs. 98.05 and intraday low of 98.05. The net turnover during the day was Rs. 1012562.

Source : Equity Bulls

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