Indiabulls group is really on a home-cleaning spree from the look of it. First they cleaned up the mess in Indiabulls Real Estate (IRE) and handed it over to Blackstone-Embassy combine. This is an Indo-US real-estate combo with both the companies commanding great respect in this sector in their respective countries. I had already recommended IRE at sub-100 levels when this deal was confirmed but in the initial stages. And from then on from levels of 80-odd, it has already doubled to 160. And it is not done yet for 2 reasons – the real estate boom in India with the tailwinds of all-time low housing interest rates and the hybrid WFH model becoming mainstream in most service industries giving rise to tremendous demand for housing at all price points. IRE is all set to get re-rated in the coming period once its full makeover with a change of name is in place. And some of that sheen is likely to rub-off on its housing finance sibling, Indiabulls Housing Finance (IHF).
IHF was hugely impacted by the IL&FS crisis and the resultant liquidity squeeze. In the last 3 years, its loan book has halved and 25% of it now constitutes risky developer’s loans. Even though the company has a CAR of 30.65%, more than double the regulatory mandatory, increased competition from banks and higher cost of funds has posed fresh challenges for the company in the last three years.
Sameer Gehlaut, one of the original founders of Indiabulls group along with Gagan Banga, sold off half of his stake in the company (11.9%) last week and has now less than 10% from above 20% earlier. And this stake was bought by marquee investors like PE giant Blackstone Inc, sovereign wealth fund Abu Dhabi Investment Authority (ADIA), and local mutual funds Invesco and Quant Capital. Blackstone owns 3% in IHF while ADIA has 2% after the share purchase. It will now be a professionally managed and run company. The entry of these reputed investors will give IHF a new sheen and remove the taint of the previous promoters who were always in some run-in or the others with regulators over the last few years. Another attempt at getting a banking licence is also an option as the company will now be controlled by a diversified set of investors with no links to any group. Its earlier attempt to get a banking license through the takeover of Lakshmi Vilas Bank (LVB) in 2019 was shot down by the regulator due to the involvement of Indiabulls group. The company is now talking to a few large institutional investors (including Blackstone) for a strategic stake sale to bring in a strong promoter. Since Blackstone will have the first right of refusal (FROR) for this stake as well, it is highly likely that they will not let go of it. This surely is a game-changing moment of IHF and its investors.
IHF has now moved to a co-lending model in partnership with six banks and fellow NBFC HDFC. The company expects to slowly increase loan disbursements and ultimately grow its AUM by 20% in fiscal 2023 just through lending to individuals. IHF is currently quoting at about 0.8 times its book which is very low for a company its size. Avg. P/B for HFC is in the range of 1.4-1.8 while this is nearly half of that.
The other benefit that is likely to accrue to IHF post the change of promoters is that its cost of funds will likely come down significantly. Blackstone can easily raise debt at fractional (near 0) rates abroad or if it comes to that, pump in its own money for IHF’s growth. That interest savings itself will directly go into IHF’s bottom-line. Its RoE can easily double from the current levels of 6-7% to 13-14% in the next few quarters. And the best part is that all corporate governance issues will be wiped off with the entry of Blackstone & team. All of this will easily lead to a re-rating of IHF.
And as we have seen in most cases, the fortunes of a company change for the better many times over after a PE takeover of a company due to the reasons mentioned above. The same is likely to be the case here as well. Blackstone also bought Mphasis in 2016 @ Rs. 450/share from HP and subsequently sold some stake to ADIA @ Rs1600/share in early 2021 and today it is quoting @3000+/share. Incidentally the same partner ADIA (as in Mpasis) is here also with Blackstone.
IHF's track record under Sameer Gehlaut has been a mixed bag. While the company rode the NBFC cycle to the top before the bust of IL&FS, it suffered as funding sources froze up in the aftermath of India's mini-Lehman moment. Now that he is out and things are slowly coming back to normalcy, led by Blackstone and other pedigreed investors, this can surely be a potential multi-bagger similar to its erstwhile sibling IRE.
In the words of its VC, MD & CEO Gagan Banga, IHF is ready for version 3.0 and the decision by its promoter Sameer Gehlaut to resign is part of the process of institutionalisation. Other focus areas would be reduction in balance sheet, develop loan book, and continuing emphasis on capex towards technology.
With this makeover, both erstwhile Indiabulls companies have many legs to run yet and this is as good a time as any to hop on to the gravy train.
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