Lakshmi Vilas Bank MD's exit weighs on Indiabulls Housing Finance stock

The housing financier has indicated it hopes to hear from the RBI by early October on its merge with Lakshmi Vilas Bank

As an early reaction to Wednesday’s news of the resignation of Parthasarathi Mukherjee, managing director (MD) and chief executive officer (CEO), Lakshmi Vilas Bank (LVB), the Indiabulls Housing Finance (IHFL) stock fell nearly 8 per cent intra-day to touch a 52-week low of Rs 421.10. However, during the course of Thursday’s trade, it recovered reasonably to end only 1.7 per cent lower than the previous day’s closing.
 
What also weighed on the stock is its replacement in the CNX Nifty50 index with Nestlé effective September 27. The move, according to reports, could result in money, particularly by foreign investors invested through their passive funds, flowing out of IHFL to rebalance their portfolio. Foreign portfolio investors hold 52.88 per cent in the IHFL stock, down 373 basis points, compared to the March quarter levels.
 
While this Nifty rejig is a technical adjustment to the IHFL stock, the exit of LVB’s MD and CEO comes at an inappropriate time.
 
“There is no replacement yet for the MD’s position. The senior management team taking guidance from the existing board members will be involved in the functioning of the bank,” said a person aware of the development.

LVB’s board has two nominee directors appointed by the Reserve Bank of India (RBI), who are likely to play a closer role in functioning of LVB, including taking forward the merger.
 
While the Competition Commission of India has approved of the merger, the key nod from the RBI is pending. The housing financier has indicated it hopes to hear from the central bank by the end of September, or early October.
 
Considering that the IHFL stock has corrected over 47 per cent year-to-date, clearing the doubts over the deal receiving RBI’s blessing is critical to salvage the stock. “We believe the conversion to a bank remains key for IHFL to secure a more sustainable and scalable platform for consistent asset growth, though it will significantly dilute its current high profitability. Regulatory approval for the same is a key catalyst for the stock,” analysts at Credit Suisse note.
 
The need for a banking channel became prominent after the April-June quarter results, with IHFL’s net profit falling 24 per cent and loan growth by 10 per cent, on a year-on-year basis. Even if LVB isn’t a healthy franchise, the merger would allow IHFL access to deposits (which is the cheapest source of funds for a bank) and an avenue to broad-base its lending into segments such as small business loans, gold loans, agri loans and so on.
 
But, going by the current loan books of LVB and IHFL, what could be a hurdle for the RBI is its apprehension over banks’ exposure to sensitive sectors, namely, real estate, securities, and commodities. The combined entities’ exposure to real estate sector is currently over 22 per cent, while most private banks operate well below the 5 per cent mark. While IHFL, based on its presentation filed with stock exchanges, satisfies the ‘fit and proper’ condition of the licensing requirements, crossing the hurdle on sensitive sector exposure among other parameters will be crucial for the merger.
 
Meanwhile, news reports suggest that Sameer Gehlaut, promoter of IHFL, anticipated to hold about 19 per cent stake in the merged entity, has promised the regulator he will hold not more than 10 per cent stake in the bank upon merger and not seek any control in its day-to-day functioning.
 
How the RBI accepts it is not known yet.