Indiabulls Housing Finance shifts focus back to fundamentals; stock up 11%

Incremental cost of funds was high at nearly 9 per cent, key financials also remained under pressure in Q3

The Indiabulls Housing Finance stock was among the top gainers on Thursday, rising nearly 11 per cent as the Ministry of Corporate Affairs clarified that there were no irregularities in deals closed by the lender. This certainly puts to rest some litigation surrounding the firm, though it also puts the onus back on an improvement in financials for the rally to sustain.

In the December quarter (Q3), net interest income fell 50 per cent and net profit 44 per cent over the year-ago period, indicating that operational conditions remained weak.

The question is how fast they can normalise, given its business reorganisation comes at a time when the underlying demand for real estate — residential or commercial — remains soft. The company has stated plans to remain asset-light and focus on the more-lucrative retail home loans.

 

Balance sheet (B/S) growth is anticipated to be well off its past growth rates, which was upwards of 20 per cent until FY19. Yet, it is working with banks on co-origination of loans, securitisation, and sell-down of assets. The persistent issue over cost of funds only adds to pressure. While incremental cost of funds fell marginally to 8.97 per cent in Q3 (down 12 basis points or bps sequentially), it was still higher than the blended cost of funds at 8.85 per cent.

Though its peers are witnessing a fall in incremental cost of borrowing, the same isn’t true for Indiabulls Housing. For now, the fact that nearly 16 per cent of its B/S is maintained as cash continues to provide comfort on the asset-liability management (ALM) front. Besides, how its 34 per cent non-housing book takes shape with respect to asset quality also needs to be seen. In Q3, gross non-performing asset (NPA) ratio rose to 1.9 per cent from 1.5 per cent in Q2, and 0.8 per cent a year ago.

Analysts at Edelweiss feel issues in realty loans (developer finance and loan against property) and access to liquidity in the current environment will pose operating challenges. Hence, the transition to an asset-light model will be arduous.

“Emerging challenges around realty warrant caution on growth and asset quality,” the analysts added. Net interest margin at 3.2 per cent in Q3 was down for the third consecutive quarter. After a sharp drop in FY20, Edelweiss estimates earnings to fall 8 per cent in FY21.

Therefore, for investors to remain interested, regaining profitable growth momentum is key.