Indiabulls Housing Fin stock may stay subdued as growth remains elusive

At over 30 per cent capital adequacy, the lender has raised Rs 2,780 crore of debt and Rs 2,577 crore of equity so far in FY21

It has been nearly two months since Indiabulls Housing Finance's successful round of qualified institutional placement (QIP) and the Rs 1,894 crore it raised by divesting stake in its UK-based OakNorth Bank subsidiary. Yet the company's stock has not been able to regain the Street’s confidence. At Rs 144.3 a share, the stock trades at 30 per cent discount to its QIP price at Rs 206.7 a share which was at par with its market price when the issue was launched in September. In FY21, India’s third largest housing financier raised Rs 2,577 crore equity and Rs 2,780 crore debt, taking its capital adequacy to over 30 per cent - highest among listed housing financiers. What’s more, with about Rs 4,500 crore of developer book sold down in September quarter, the share of developer book has further fallen to 18 per cent. As on March 31, 2020 the non-housing portfolio of the lender accounted for 36 per cent of loan book.

Yet if these aspects aren’t being acknowledged by the Street, its likely because profit growth remains an elusive patch for the lender. About a year back, after the merger proposal with Lakshmi Vilas Bank (LVB) was struck down by the regulator, Indiabulls Housing said that it would approach its business differently. The lender planned to adopt an asset light model, whereby 40 per cent of total loans would be co-originated with banks, 40 per cent sold down and only 20 per cent retained in its balance sheet. Therefore, Indiabulls Housing’s assets would be restricted to only 32 per cent of total loans it builds in a year. While this model would position Indiabulls Housing as a fee income-oriented financier, driving an annually compounded net profit growth of 17 per cent in FY20 – FY24 as per its investor presentation,  it would restrict its asset growth to three per cent as against 25 per cent plus growth in the past. Not only that, such a model is also a departure from the traditional strategy of growing the balance sheet for housing financiers. “It is totally unheard of in India and in early stages even for Indiabulls Housing,” said an analyst with foreign brokerage. “How this model pays off would depend on the strength of co-origination and sell-down contracts that the housing financier inks with banks,” he adds.

So, what necessitated a change in strategy?

Growth moderation was first felt in the June 2019 quarter, as merger talks with LVB gained momentum.  “In hindsight, it may have been better for us to continue to play on our strengths and evolve as a NBFC/HFC rather than seek merger with a bank,” says Gagan Banga, vice chairman and managing director, Indiabulls Housing Finance. That said, he feels that the silver lining of the litigations that came as a consequence of the attempted merger is that various regulators and agencies inspected and audited their books. “Now when we report any number around delinquency or any other elements, it’s reported after the rigour of having gone through various audits,” he emphasizes. Banga is confident that soon the Street will acknowledge this.

However, for almost a year, the stock hasn’t enjoyed active coverage among analysts. “Investors may take another year to judge the efficiency of Indiabulls Housing’s operating model,” says the analysts quoted above. Those at Credit Suisse add that the quantum of loan restructuring will be a key monitorable. The brokerage has slashed its earnings target for FY21 and FY22. For the past optimism on Indiabulls Housing stock to return, improving on growth is imperative.