Magma Fincorp- Rising Sun Holdings deal impact

Magma Fincorp- Rising Sun Holdings deal impact

Last updated: 19 Feb, 2021 | 10:18 am

Magma Fincorp- Rising Sun Holdings deal impact

Details of the deal

  • Magma Fincorp has announced that Adar Poonawalla-promoted Rising Sun Holdings will acquire a 60% in the company by subscribing to a Rs 3,456-crore preferential issue. As the new promoters stake in the company is proposed to be above 25%, an open offer would also be triggered.
  • After the infusion of capital, Magma Fincorp and its subsidiaries will be renamed and rebranded as Poonawalla Finance. Poonawalla Finance is an existing finance company owned by the Poonawalla family, which owns Serum Institute of India. The final financial entity will be called Poonawalla Finance.

Why is the deal being done?

  • Magma Fincorp said that the deal would help in increasing the capital adequacy ratio from 28% as of 31 December 2020 to 68% post issuance
  • Backing of a strong corporate group is also likely to have a positive impact on credit ratings, and would lower the cost of funds, according to Magma Fincorp.
  • This would allow the company to offer loans at competitive yields, to a higher quality customer, leading to a structural improvement in asset quality, reduction in credit costs and therefore enhanced profitability.

Share price reaction

In the past two weeks, Magma Fincorp's shares have been on a rising spree after its robust performance in Oct- Dec 20 earnings. The announcement of the deal has led to further rally in the stock, with the stock consistently hitting upper circuit in the last few days. The shares have gained more than 160% in the month so far.

Actions by rating agencies and brokerages

ICRA places rating on hold with developing implications

Following the announcement of the deal, ICRA has placed the rating of the company's long-term fund-based term loans on watch with developing implications. ICRA said that the proposed capital infusion would be a positive for the group's capitalisation profile and would provide capital for both absorbing losses as well as fund growth over the medium-term. 

ACUITE places ratings on watch with positive implications

ACUITE has also placed the company's unsecured subordinated redeemable non-convertible debentures under watch with positive implication. ACUITE has said the expected equity infusion will strengthen the capital position of Magma and its subsidiaries in a very significant manner which in turn will help to enhance its business profile over the medium term.

Brokerages' take

According to ICICI Securities, the new promoter and management will leverage the company's niche products, geography and customer franchise to improve its market positioning and capitalise on growth opportunities. ICICI Securities has a \'Buy'on the stock with a target price of Rs 125.