Adar Poonawala takes control of Magma Fincorp via equity infusion of Rs 3,456 crore

As the second wave of Covid-19 is subsiding, the new management is expected to drive business acceleration.

Adar Poonawalla on Monday took over as chairman of Magma Fincorp, a non-banking finance company. This follows the acquisition of controlling stake in Magma thorough an equity infusion of Rs 3,456 crore in May 2021 by Rising Sun Holdings.

Magma Fincorp is now a subsidiary of Rising Sun Holdings, owned and controlled by Poonawalla. With 60% shares owned by Rising Sun Holdings, the company is now part of the Poonawalla Group. The rebranding of the company as a Poonawalla Group firm is underway.

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In an investor presentation, the company said it was aiming to be among top 3 NBFCs for consumer and small/medium business finance. The equity infusion had resulted in the tier-1 capital adequacy ratio of the company increase to 66.8% as on May 15, 2021, with leverage standing at 1.3x as on the same date. The company had overall liquidity of Rs 5,058 crore, net-worth of Rs 5,650 crore and tier-1 CRAR at 66.8%.

The company said it would accelerate the growth trajectory of subsidiaries followed by value unlocking through IPO. The insurance joint venture, Magma HDI, had received commitments for fresh capital of Rs 250 crore from ICICI Venture, Morgan Stanley PE Asia, together with a secondary sale by promoters for Rs 275 crore to comply with RBI guidelines for ownership of stake in insurance companies. Magma Fincorp has infused Rs 500 crore equity capital into Magma HFC on May 31, 2021, shoring up the net-worth of the HFC to around Rs 1,000 crore.

It had improved operating performance during FY21 and reported increase in NIMs, reduction in operating expense ratios, reduction in cost of funds and the company has exited FY21 with a very strong balance sheet. The company has seen a reduction in cost of funds in the recent past with Q4 cost of funds down 62 basis points year-on-year and FY21 cost of funds lower 36 basis points year-on-year.

Apart from one-time incremental write-off impact of Rs 274 crore, the company has created management overlay provisions of Rs 621 crore, aggregating to a one-time profit and loss charge of Rs 895 crore. Loss before tax stood at Rs 749 crore for FY21. The company expects some recoveries from written-off contracts through legal actions taken against the defaulting customers which would flow into income in subsequent quarters. The management is confident that with such provisions buffers and stringent write-off policies, it is adequately prepared to deal with the potential impact of the Covid’s ongoing second wave in FY22.

The company also announced leadership changes with Abhay Bhutada taking over as managing director and Vijay Deshwal joining as the CEO of Magma Fincorp from July 2021. Deshwal is currently business head with ICICI Bank. In addition, Deshwal would also be the Group CEO of Poonawalla Group financial services business. These changes reflect the company’s transition into the next phase of growth. As the second wave of Covid-19 is subsiding, the new management is expected to drive business acceleration.

“We have outlined the core strategic pillars of Magma 2.0, laying out a clear and focused direction for the company,” Bhutada said. Magma 2.0 would be a professionally-run organisation under a new leadership team fully supported by the existing leadership, capitalise benefits from large capital base and stronger parentage, Bhutada said. There would be early recognition and tackling of asset quality challenges with accelerated write-offs and buffer provisioning, robust ALM profile, risk management technology and data analytics, he said.

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