Street shrugs off Indiabulls HF's OakNorth acquisition

Analysts consider deal value expensive but remain positive on company's core business

Indiabulls Housing Finance  acquisition of UK-based OakNorth did not go down well with the Street, with its stock diving 17.5 per cent intra-day before closing 10 per cent lower at Rs 643.85.

First, analysts believe the deal value of $100 million (Rs 660 crore) for a 39.76 per cent stake (valuing the bank at $250 million) appears expensive, as OakNorth is a new bank, with a relatively small scale of operations. Nomura says the bank, which obtained its licence in March and started mobilising deposits through online sources only over the past six weeks, has a small loan book of £25-30 million and deposit base of £10-15 million.

Secondly, not many buy the management’s belief that this acquisition will make it easier for Indiabulls HF to get the Reserve Bank of India  nod to become a deposit-taking non-banking financial company (NBFC). Adding that while deposits provide a stable source of funding, they are not the cheapest source.

  “We believe there are too many ‘ifs and buts’. These include how successful the start-up bank will be, will the regulator consider overseas experience enough for granting a domestic licence, and would the regulator still prefer to give a licence as a bank (which they could have done, anyway) or grant a licence as an NBFC/HFC,” write analysts at Nomura. The deal values the bank at 1.9 times (after capital infusion by Indiabulls, OakNorth’s net worth will increase to $131 million), at a premium for a UK bank.

The two businesses do not have direct synergies. So, any gains for Indiabulls will accrue only in the long run and  depend on OakNorth’s ability to grow operations profitably. Gagan Banga, vice-chairman and managing director of Indiabulls HF, though, believes the bank will grow at a good pace and an initial public offering at three times the book will enhance Indiabulls’ value.

Although the current amount invested in OakNorth is only six per cent of Indiabulls HF’s net worth and is unlikely to be a strain on the company’s earnings, there are some worries over growth capital for core business.

OakNorth Bank’s management team is credible. The  senior management team consists of investors such as Rishi Khosla (an early investor in PayPal). Nomura believes Khosla was also an early stage investor (in Mittal group) in Indiabulls HF. Therefore, Indiabulls HF now investing in Khosla’s company can be perceived as a moral hazard.  Unhappiness also stems from the fact that this deal comes barely two months after Indiabulls HF raised Rs 4,000 crore as equity capital from investors. Prior knowledge of the deal would have helped investors take a informed decision.

For now, investors have one solace which is that Indiabulls HF’s core business, which has been responsible for the significant re-rating of its stock in the past two years, continues to do well. Its assets under management (AUM) have grown 38 per cent over the past five years, making Indiabulls the third largest housing finance company. The future prospects, too, appear healthy with management confident of delivering 20-25 per cent growth in earnings and AUMs. Not surprisingly, most analysts remain positive on the company.