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Indiabulls Housing Finance : Have We Got Another Burst ?

It has been almost six months since the merger with Lakshmi Vilas Bank was announced on 8th April 2019, that would have been beneficial two both groups as there was major liquidity squeeze from September 2018 and rise in asset quality.

During this time the loan assets of the company have de-grown by 10% resulting in Net Interest Income falling by 13% and Profit Before Tax de-growing by 21% . Source of funding has changed post the liquidity from short term paper to long term paper or sale of loan assets that is unsustainable for higher loan growth and NII stability.

The stock price has fallen by 69% since the announcement as there have been updates where the conditions to get RBI approval has been stricter and agreeing to these conditions makes the management give an impression that without such merger continuity might be at risk.

If it the strict conditions were not enough there was another issue that allegations were raised by prominent team of lawyers in that Money Laundering chargers are made against the company. That was initially dismissed and withdrawn by one of the filling party. But recently another set of PIL had been filed in Delhi High Court that got admitted on Friday and on same the notices has been issued to company and promoter.

Meanwhile the proposed merger has taken another hit as Lakshmi Vilas Bank has been put under PCA (Prompt Corrective Action) by RBI that does not harm operation but puts a big doubt on merger of the two entities when facing such conditions at individual level .

As the NBFC was already facing pressure on the liquidity side the NCDs that are to be matured in September 2026 with a coupon rate of 8.65%-9.15% have already spiked today to the range of 11.16% -19% YTM resulting a large loss of the debenture holders. This would result in further pressure on fund sourcing and even if given would result in big jump in cost which will impact NIMs. As of March 2019 it has Rs. 95,000cr of borrowing and Rs. 23,000 cr of Cash & Current Investments that was recently raised by sale of loans.

Source : BSE

We would continue to keep a SELL rating in Indiabulls group & Lakshmi Villas Bank with 90% of odds that RBI will not approve the merger that was previous at 65% .

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