Indiabulls Housing Finance Merger with Lakshmi Vilas Bank – Our Analysis

Why is Indiabulls Housing Finance Stock Going Down?

Introduction

In this article, we will see why is Indiabulls Housing Finance stock going down? It was announced on 3rd May, 2019 that Indiabulls Housing Finance, along with its subsidiary Indiabulls Commercial Credit Ltd. (IBCCL), will be merged into Lakshmi Villas Bank. Lets analyse the merger impact on both the stocks.

Company Profiles

Indiabulls Housing Finance Limited is a mortgage lender. It is headquartered in New Delhi, India. It is India’s 2^nd largest housing finance company and is regulated by the National Housing Bank. It is part of Sameer Gehlaut’s Indiabulls group and contributes approximately 80% of the groups turnover.

Lakshmi Vilas Bank was founded in 1926 by a group of seven businessmen of Karur under the leadership of Shri V.S.N. Ramalinga Chettiar. Their objective was to cater to the financial needs of people in and around Karur who were occupied in trading businesses, industry and agriculture.

Indiabulls Commercial Credit Ltd. (IBCCL), incorporated in 2006, is a wholly owned subsidiary of Indiabulls Housing Finance Ltd. (IBHFL) and is classified as a Non-Deposit taking Systematically Important (ND-SI) Non-Banking Financial Company (NBFC).

Merger with Lakshmi Villas Bank

• There was news on 5^th April,2019 that Lakshmi Vilas bank was to be merged into Indiabulls Housing Finance Ltd. But if it would have been the case, then Indiabulls Housing Finance wold have had to get the banking license and pass all the rules & regulations of RBI.
• But recently on 4^th May, 2019, a change in the merger agreement was announced. Now, Indiabulls Housing Finance, along with its subsidiary Indiabulls Commercial Credit Ltd. (IBCCL), will be merged into Lakshmi Villas Bank. The change will potentially make it easier for both IHF and IBCCL to get regulatory approval.
• The current Market Capitalization of Indiabulls Housing Finance is almost Rs. 30,000 Cr. And the Market Capitalization of Lakshmi Vilas Bank is Rs. 2,500 Cr. A vast difference between the market cap of the two can be clearly observed.

Key Financials of Indiabulls Housing Finance & Lakshmi Vilas Bank Before & post Merger

Reasons Behind The Merger

What happened that Indiabulls Housing Finance had to merge into Lakshmi Vilas Bank?

1. NBFC or Liquidity Crisis

• Because of IL&FS problem, it is going difficult for the Non-Banking Financial Companies (NBFCs) to raise the money. Due to which these NBFCs are not able to execute the lending as aggressively as they want. For example, the NBFC which was raising the funds from the market at 7%-8% earlier, have to pay 10%-10.5% interest for the same amount of fund raising. So in such situation, how these NBFCs can lend money to other retail customers (who will be taking loans from these NBFCs) at the comparative lower or discounted interest rates. This overall scenario is called as “Liquidity Crisis”.
• This is not the situation in case of Banks. On the other hand, Banks are having the clear mandates in which they are suggested to focus more on the retail loans than the corporate loans. Thus, banks are having availability of cash (ie. having more liquidity) with them as compared to NBFCs.
• The aggressiveness in the business can be seen more for NBFCs than for banks. But, in the intension of high business growth, there is a lot of pushing in case of NBFCs. Thus, because of liquidity crisis for NBFCs, lot of problems have arisen in loans disbursement process.
• This NBFC crisis which started in August 2018 and are still continuing might be the reason behind this merger.

2. Asset Liability Mismatch

• The NBFC’s have a business of borrowing the money from others first and then lending it to customers ahead. The difference between that is their income. The home loans give out by housing finance companies have a horizon of 15, 20, 25 years.
• When an housing finance borrows money it cannot borrow money on papers with loans with maturity more than 10 years. So, here naturally a mismatch is created. But this is the case in all the housing companies.
• On top of that, Indiabulls Housing Finance was borrowing commercial papers with 1 year maturity, papers with 2 years maturity, debentures with 3 years maturity and similar. Where as they were giving out loans with maturity of more than 15 years.
• So, when the maturity on the borrowed money is due, that’s when the problems start. The company has been paying their loans but have to take a lot of efforts to do that They are doing it by selling their businesses, meaning selling their high amount loans to other companies.

• Thus, after all of this Indiabulls Housing Finance has understood that they cannot run their business successfully by remaining in just non-banking sector. They need a strong retail banking franchise to continue with their business model. And thus, this merger might be the attempt to do that.
• These are also the reasons why the share price of Indiabulls Housing Finance is going down.

Merger Benefits

• It is obviously Lakshmi Vilas Bank will be major beneficiary. Though Indiabulls Housing Finance will merged into Lakshmi Vilas Bank, all the calls and decisions will be made by Indiabulls Housing Finance. It is going to be the one who, will run the business in the future. Lakshmi Vilas Bank is the clear winner in the merger.
• But Indiabulls Hosing Finance will be running the management of the merged entity.
• Though Lakshmi Vilas Bank has high NPA numbers, but they will start coming down when the books of these 2 companies get combined.
• As Indiabulls Housing Finance will get a retail banking segment attached to it they won’t face much problems in raising money as banks don’t face any major issues while raising finances.
• An investor will get 7.143 share of Lakshmi Vilas Bank for every 1 share of Indiabulls Housing Finance Ltd. For example, if a person has 1000 shares of Indiabulls Housing Finance Ltd, then he will receive 7,143 shares of Lakshmi Vilas Bank.

MERGER EFFECT ON THE STOCKS PERFORMANCES

• Because of this the share price of Indiabulls Housing came down from around Rs. 1,400 in August 2018 to Rs. 690, currently. The share price of Indiabulls Housing Finance is almost 50% down.
• Currently, Indiabulls Housing Finance Ltd is trading around Rs. 690. And Lakshmi Vilas Bank is trading around. Rs. 75. Thus, there is clearly a huge difference and mismatch.
• There are chances that the share price of Lakshmi Vilas Bank may go up and that of Indiabulls Housing Finance will go down owing to this merger. This will happen till the ratio of 1:7.143 is achieved.

Notes: –

• The numbers that are used are approximate and have been rounded for presentation purposes.
• We are not in any way saying that this is a bad company, or the stock of this company is bad.
• We are also not suggesting anyone to immediately go and buy the stock or invest in the stock markets.
• Only an analysis has been presented here. No judgments or final statements are being made here.