Mumbai: Kohlberg Kravis Roberts and Co. LP (KKR) and International Finance Corp. (IFC), the private investment arm of the World Bank, have together invested Rs 440 crore in Magma Fincorp Ltd, a Kolkata-based non-banking financial company (NBFC).
KKR paid Rs 236.31 crore for a 14.95% stake, while IFC has invested Rs 202.4 crore for a 12.8% stake.
At this price, KKR and IFC have paid Rs 88 a share of Magma Fincorp. Its stock on Monday rose 8% to close at Rs 74.95 apiece on the Bombay Stock Exchange even as the exchange’s benchmark Sensex fell 1.8%.
Following the transaction, the promoter shareholding will come down by 11.52% to 31.08% and public holding will be down by 2.30% to 5.98%.
The funds will be used by the company for expansion and business model recast.
“We would like to de-risk our model,” said Sanjay Chamria, vice-chairman and managing director of Magma Fincorp.
The money raised will be used to reduce the dependency on securitization from 50% to 20%, increase the loan disbursement by 50% in fiscal 2012 and raise the share of high-yield assets to absorb the rise in cost of funds, Chamria said.
Explaining the rationale behind opting for PE funding, he said: “We needed equity capital and not preference capital, especially since the Reserve Bank of India has increased the minimum capital adequacy ratio requirement to 15% from 12% earlier for NBFCs in its April 2011 policy announcement.” Magma Fincorp’s capital adequacy now is 18.23% and it will be raised about 25%.
Magma Fincorp’s fund-based product portfolio provides finance for commercial vehicles, cars and multi-utility vehicles, construction equipment, tractors, loans for small and mid-caps and distribution of insurance.
This is KKR’s first investment in the financial services sector in India.
Sanjay Nayar, country head and chief executive of KKR India, said the NBFC sector requires long-term partnership. “Apart from providing capital, we will help them in new product strategy and widening and deepening product and customer suite focused on agri, rural and SME (small and medium enterprises) segments,” he said.
KKR has deployed around $1 billion (Rs 4,530 crore) across five deals in India since 2006. These include $250 million in Bharti Infratel Ltd, $900 million in Aricent Inc., $167.37 million in Dalmia Cement (Bharat) Ltd, and $75 million in Coffee Day Holdings. In addition to equity transactions, KKR has completed four debt transactions worth around Rs 2,800 crore through its non-banking finance arm KKR India Financial Services Pvt. Ltd, set up in 2009.
The investment by IFC will provide Magma with strategic capital and enable the company to expand its footprint in semi-urban and rural areas in Bihar, West Bengal, Orissa, Chhattisgarh, Uttar Pradesh and Rajasthan.
According to Rajeev Suneja, partner-transaction advisory services, Ernst and Young India, investment interest in the NBFC sector is on the rise. Ernst and Young and Wadia Ghandy advised Magma on the transaction. KKR was advised by Ernst and Young, McKinsey and Co., Simpson Thacher and Bartlett, AZB Partners and Kotak Mahindra Capital. In 2009 there were 31 investments worth $218.02 million in NBFCs which increased to 49 deals worth $883.72 million in 2010, according to data from VCCEdge, a financial research platform. In 2011 so far there have been 14 investments worth $269.53 million in the sector.
“There were 8-10 investors who had shown interest and the deal took three months to close,” said Suneja.
The company reported profit after tax of Rs 122 crore for the year ended 31st March 2011, against Rs 71 crore in the previous year. The total assets under management of the company was Rs 10,907 crore in 2011 on a Rs 5,415 crore loan disbursement.
Analysts expect the growth momentum to continue in the current fiscal too. According to 20 April report by Deepti Chauhan of Asit C. Mehta Investment Intermediaries Ltd, a brokerage, Magma Fincorp has been consistently improving its operating performance.
“The company is focusing on high-yielding loan segment with a view to improve margins. The company’s asset quality is robust and has strong collection efficiency,” she said while maintaining a “buy” on the company.
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