Indiabulls Housing stock likely to witness near-term pressure

While the Street appreciates the retail strength of Lakshmi Vilas Bank, the housing finance major's capital crunch and asset quality are key concerns

Any merger in the banking sector entails near-term pain, but mostly ends up being value accretive in the long run. Same could be the case for Indiabulls Housing Finance, which on Friday last week announced a merger with Lakshmi Vilas Bank (LVB). 

The LVB stock has in the past week gained over 20 per cent on the likelihood of the transaction, which will lead to significant benefits for the private bank reeling under bad loan, capital and growth concerns.

Comparatively, the Indiabulls Housing stock hasnot been so brisk in the bourses, up 7 per cent in the past week, to Rs 903.15. In fact, experts say there could be downside pressure on Indiabulls Housing stock in the coming days as the Street isn’t too pleased with the 36 per cent premium that the housing finance major has offered to shareholders of LVB for the merger. “Pressure may grip over the housing financier’s stock on Monday as some investors raise concerns over the merged entity’s asset quality and capital adequacy,” says a market expert not wanting to be named. 

LVB’s gross non-performing asset (NPA) ratio of 14 per cent and tier-1 capital adequacy ratio of 5.6 per cent is the weakest among private banks. Even if the merged entity’s gross NPA ratio and tier-1 capital adequacy come in at 3.5 per cent and 14 per cent, respectively, it is still not in sync with Indiabulls Housing’s current performance. At present, the housing financier’s gross NPA ratio is well within a per cent and enjoys tier-1 capital adequacy of 16 per cent. Therefore, investors question if the bargain for a deposit base of Rs 30,787 crore and a network of about 570 branches, largely spread across South India, is fairly steep considering the near-term concerns. 

The Reserve Bank of India has said it has not yet approved the merger proposal. The clarification from the RBI over the weekend, with respect to approvals required for the merger, could also be a sentiment dampener for investors. 

Nonetheless, analysts say, the deal is structurally positive looking at the transition to a banking platform and scope to build a sustainable and scalable business model. Those at Edelweiss Securities say the strategic value unlocking should outweigh the price (premium). 

“Indiabulls Housing is moving up the curve and given its good track record, efficient churning of banking platform will bring forth synergies over the medium-term,” they add. 

The brokerage has also raised its target price on the stock by 16 per cent to Rs 1,104 apiece after the announcement of the merger.