Buyout may fuel Magma Fin growth: Analysts

A change of guard at Magma Fincorp, with Rising Sun Holdings — controlled by Adar Poonawalla (pictured) — acquiring a 60 per cent stake in the former, could turn fortunes of the West Bengal-based NBFC around, say analysts. Therefore, the rush by investors to buy MFL shares — locked in the 10 per cent upper circuit band at ~93.4 on the BSE, also its 52-week high — hardly came as a surprise.

From its 52-week low of ~12.7 on May 28, 2020, the stock has risen 635 per cent, show BSE data. In comparison, the Sensex has doubled during the period. In February alone, MFL more than doubled from the earlier ~45.1.

“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 ~70 per share — a near34 per cent discount to its December 2020 book value of ~106. MFL’S total share capital as of December stood at ~2,860 crore, which will rise to ~6,300 crore (post-allotment) — a proposed 65-per-cent dilution of its enhanced capital, the statement added.

“The new promoter and management will leverage Magma’s niche products, geography and customer franchise to improve market positioning,” note analysts at ICICI Securities.

Further, the preferential issue under the deal will enhance MFL’S capital adequacy to 68 per cent. At the end of FY20, MFL’S net worth stood at ~2,748 crore, with nearly ~15,240 crore in total assets.

In the December quarter of FY21, MFL reported pre-tax profit (PBT) of ~17 crore, compared to a PBT of ~30 crore a year ago. AUM declined from ~16,574 crore in Q3FY20 to ~15,006 crore during this period.

NIM and collection efficiency, however, improved to 8.5 per cent (from 7.7 per cent in Q3FY20), and 94 per cent in December 2020 (from 90 per cent in November 2020).

“While the company delivered a decent set of results, expansion in

NIM, improved collection efficiency at 97 per cent in January, and an 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 ~95.

ICICI Securities expects MFL’S 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 a better return profile... This infusion will enable Magma Fincorp to invest in its housing finance subsidiary and general insurance joint venture further, as required,” the brokerage noted. ICICI Securities, too, has a ‘Buy’ rating with a target price of ~125.

However, clarity on business strategy after the takeover stays low.

Emkay Global, for instance, remains concerned about MFL’S overall asset quality profile, considering elevated credit costs at 350 bps during Q3FY21 and proposed restructured book of 5-6 per cent of its AUM.