IL&FS exposure only a sentiment dampener for IndusInd Bank

Certainty of at least a partial repayment gives hope to investors; concerns partly priced in

IndusInd Bank’s declaration of its exposure to troubled infrastructure group IL&FS, on Wednesday, caught many by surprise. Yet, the bank’s stock, after a gap-down opening in Thursday’s trade, closed the day with gains of over 2 per cent. The reason: most analysts believe the final impact on IndusInd’s financials may not be significant and much of the pain may be priced in.

The bank divulged details of its total Rs 30-billion exposure to the IL&FS group — Rs 20 billion to the holding company and Rs 10 billion towards special purpose vehicles (or associate companies) set up to execute certain road projects.

While the latter was known, the former is a fresh can of worms. Since the bank has already set aside Rs 2.5 billion as provision in Q2 towards the exposure to the SPV and is also backed by cash flows, this isn’t much of a concern. 

The Rs 20 billion lent to the holding company is backed only by a mandatory pre-payment clause against any rights issue done by the company and/or liquidity support from shareholders for 50 per cent of the cash flow utilised for pre-payment. 

The rights issue, however, didn't evoke adequate interest - Rs 45 billion of issue size receiving a mere Rs 0.5 million subscription on Wednesday suggests IndusInd Bank’s investors have to brace for haircuts in subsequent quarters. 

While the loan to the holding company is only 1.2 per cent of the bank's total book size, Suresh Ganapathy of Macquarie Capital estimates a 3-4 per cent shrinkage in IndusInd Bank's FY20 book value. IL&FS is currently classified as a standard asset by IndusInd Bank and its peers.

Moreover, IL&FS has reasonable amount of assets that the new board is looking to monetise so that the ultimate loss or write-off for creditors may not be significant. An analyst from a foreign brokerage explains that unlike cases of Essar Steel or Videocon, IL&FS has the government's blessing and a credible team working towards resolution. "Hence, IL&FS exposure may only be a sentiment dampener for a few quarters," he adds. 

In fact, Ganapathy added that with the stock correcting 33 per cent in the past three months, as against 9 per cent by the CNX Nifty, the correction is overdone. Analysts say that unless new issues emerge, they may not change their stand on the stock for its IL&FS exposure.