Magma Fincorp merges Magma ITL Finance

Magma Fincorp Limited (“Magma”) is a non-deposit taking non-banking finance company (NBFC), registered with the Reserve Bank of India (RBI) as an Asset Finance Company. The Company, having started operations over two decades back, currently having a market cap of Rs. 3,600 crores (approx.) and is listed on the Bombay Stock Exchange Limited and the National Stock Exchange in India.

Magma ITL Finance Limited (MITL) is a unlisted public company and a wholly owned subsidiary of Magma carries out the business of tractor financing. The Company is registered with the Reserve Bank of India as non-deposit taking Non- Banking Financial Company under section 45-IA of the Reserve Bank of India Act, 1934.

Transaction Overview

• Amalgamation of MITL with Magma Fincorp with an appointed date of 1^st October 2017.
• MITL being wholly owned subsidiary of Magma, no new shares will be issued in course of merger.

Share capital

Table 1: Share capital as on appointed date (All Figs. in Rs. Lacs)

• Magma Fincorp increased stake in Magma ITL from 74% to 100% as on 23rd August 2017
• Out of total public shareholding, holding by foreign portfolio investors is 58%.
• Post amalgamation there will not be any change in Shareholding of Magma.
• Authorised share capital of MITL will be merged with Magma and paid-up capital will be cancelled.

Accounting Treatment

• All assets and liabilities will be recorded at book value by the Magma.
• Inter-company balances, if any, shall stand cancelled.
• The carrying amount of “Investments” in the books of the Magma in respect of its holding in the MITL, shall stand cancelled.
• The difference in the value of Net Assets Transferred” and the carrying amount of Investments shall be adjusted in the reserves in accordance with the Accounting Standards or Generally Accepted Accounting Principles.

Approval from RBI

• Prior written approval of Reserve Bank of India will be required by the MITL.
• Magma (transferee company) is not required to take approval of Reserve Bank of India as there is no proposal for change in the shareholding pattern or paid up equity capital of the Transferee Company (as per disclosure in the scheme)

Financials:

Table 2: Financials of Both Companies (All Figs in INR Lacs)

Other Points for consideration:

Magma Fincorp

• Company is planning to raise further 750 crores in coming times, mode of rising fund is not yet clear. And in last year also company has raised around 500 crores by way of preferential allotment which was utilised towards redemption of non-convertible redeemable preference shares.
• Low promoter shareholding in the company
• Company has reported fraud in Mar-17 amounting to Rs 1.62 crores (Mar-16 -Rs 3.81 crores), though amount is small but still raises concern over its internal controls.
• Current Asset to Current liabilities ratio is 0.64 which is well below the acceptable limit

MITL

• Provision for NPA has increased from Rs. 20.88 crores to Rs. 45.83 crores as on Sept 2017 which is almost 10% of total advances given (short term and long term).
• Out of total borrowings in the company, Rs 110 crores are from the related parties and out of which majorly are from Magma which will be cancelled in course of merger as a part of intercompany holding.
• Magma has acquired 26% stake of Joint Venture partner International Tractor Ltd(ITL) (manufacturer of “Sonalika” brand tractors) in the company just before the merger. Reason maybe promoters does not want dilution of their stake in the Magma through this merger and gave exit to ITL.
  Unless the merged company execute new strategy for recoverability of loans, strengthen credit evaluation of borrowers and expansion plans, this merger will not have significant increase in shareholders’ wealth

Merger impact

• Operational and managerial benefits from the merger.
• Product mix benefit from the merger as magma having around 15,000 crores AUM out of which almost 25% is from utility Vehicles/car, 18.5% from Home Loan/ Mortgage finance and around 18% from Agricultural finance and balance from other categories (Sept-17 figures). MITL is majorly in tractor financing which will help to increase its AUM in Agri finance.
• But NPA worries in Agri finance of Magma need to be seen which is almost 17% i.e. Rs 28 crores (Approx.) of total NPA (Rs 165 crores, as per Mar-17 figures) and further 48 crores will be added to it post-merger.
• Slight increase in EPS of Magma from current EPS of Rs 2 to Rs 2.11 post merger (on standalone Basis)
• MITL is not even 1/10^th of Magma, Post-merger there will be hardly any impact on the margin of magma from its current level.

Conclusion

Magma Fincorp acquired 26% joint venture partner in August, 2017 and immediately thereafter it announced the merger. It definitely helps to integrate the process to optimise collections from its customers, reduced NPAs and also improve rating and as a result reduce finance cost. It is not clear post acquisition, International tractors will continue to support the company to get tractor financing for the merged entity. Merger will improve GNPA position due to change in strategy regarding customers’ acquisition. Though for Q4 FY 18, criteria for NPA is overdue beyond 90 days as compared to 120 days till Q3, it expects to maintain NPA around 5.3%. Before merger, it seems MITL have cleaned its book by providing NPAs and even booking substantial loss in FY17.

At present both the companies are having low margins and high NPA’s. The management has unveiled new strategy to improved ROA and NIM substantially and also increase AUM beyond Rs. 16,000 crores and profit beyond highest profit achieved in FY 16. Unless the merged company execute new strategy for recoverability of loans, strengthen credit evaluation of borrowers and expansion plans, this merger will not have significant increase in shareholders’ wealth.