Indiabulls Housing Finance shares fall 34% on concerns over LVB merger

The RBI placing Lakshmi Vilas Bank under PCA framework amidst the proposed merger, and litigation against the housing financier are perceived negatively by investors

The Indiabulls Housing Finance (IHFL) stock clocked its worst single-day loss since listing and plunged 34.4 per cent to Rs 255.50 on Monday as investors reacted adversely to the regulatory action on Lakshmi Vilas Bank (LVB), with which IHFL is having merger talks. Declining to a six-year low, experts say the worst may not be over for IHFL. Selling at the IHFL counter on Monday is said to be the highest since 2013. The Reserve Bank of India (RBI) on Saturday placed LVB under prompt corrective action (PCA).

Shares of Indiabulls Real Estate and Indiabulls Ventures too fell 10-20 per cent and hit the lower circuit to close at their 52-week lows. 

“LVB has been a PCA candidate for long because it has had two back-to-back years of losses and the net non-performing assets (NPA) ratio is much above the 6 per cent threshold,” said Sidharth Purohit of SMC Global. 

“The timing of the RBI’s action, however, has sparked fresh concerns for investors of IHFL,” he added. LVB and IHFL had announced their intention to merge on April 5 this year and in May had formally placed an application with the RBI.

The merger would have been a palliative for several of LVB’s problems including capital adequacy and bad loans, and is also beneficial for IHFL in terms of access to cheaper deposits and diversification of its loan portfolio.

Even after more than four months, IHFL and LVB haven’t formally heard from the regulator on this. Gagan Banga, vice-chairman, managing director, and chief executive officer, said in an analysts’ call on Monday that he expects the RBI’s decision on the proposed merger to come through by end October or early November. 

However, investors think otherwise. “With LVB being put on PCA, investors think that the merger may not happen anytime soon,” said an analyst with a foreign brokerage. 

The share price of LVB on Monday fell 4.9 per cent, hitting the lower circuit and touched its 52-week low.

This apart, the Delhi High Court has accepted the PIL petition filed by eminent lawyer Prashant Bhushan on IHFL, and this may be another blow to the merger plan. “Even if IHFL meets the broader requirements of the ‘fit-and-proper’ conditions laid down by the RBI to obtain a banking licence, pending litigation may not be taken positively. The RBI may wait for the final verdict to give a go-ahead for the merger,” said a lawyer with a Mumbai-based firm. 

Ashvin Parekh, an independent banking sector specialist, said: “Regulators globally and in India scan a lot of factors to declare a person or entity fit and proper.” Meanwhile, patience seems to be draining out for large investors. “We need to know one way or the other soon,” says a head of research of a foreign brokerage, not willing to be quoted. Among housing finance stocks, IHFL is second to HDFC Limited in terms of garnering foreign investors’ appeal. Data indicate that foreign investors too have been fast vacating the counter, with their holding falling from 56.61 per cent in March 2019 to 52.88 per cent in June 2019. In recent months, large brokerages such as Credit Suisse and Morgan Stanley have turned negative on IHFL stock citing reasons of merger overhang. 

In the analysts’ call, Banga said the company was adequately positioned in terms of cash to meet forthcoming repayments. A ratings downgrade does not materially changes the position.

The Indiabulls group, on its part, has been offloading its real estate assets, to see the merger go through without regulatory hindrances. Sameer Gehlaut, chairman, IHFL, has also indicated his willingness to de-promotorise and not be appointed as chairman of the merged bank. IHFL has also reduced the share of wholesale loans from 19 per cent in March ’19 quarter to 17 per cent in the June quarter and plans to reduce it further. However, even at these levels, it is seen to be above the comfort zone of RBI with respect to sensitive sector exposure. Exposure to real estate, commodities and share trading fall under RBI’s purview of sensitive sector exposure