Indiabulls Housing Prepares For A Makeover As Promoter Heads For Exit
Indiabulls Housing Finance Ltd., the fifth-largest housing financier in the country, is preparing for a makeover after Sameer Gehlaut sold half of his stake, initiating a process to exit as promoter of the company.
In a deal on Dec. 16, Gehlaut sold 11.9% of his 21.67% stake to Blackstone, Abu Dhabi Investment Authority, HSBC, Invesco and Quant Capital. Life Insurance Corp. of India, with 9.9%, is now the largest individual shareholder of the company.
The transformation of Indiabulls Housing Finance started nearly two years ago, with Gehlaut exiting the real estate business, said chief executive Gagan Banga in a conversation with BloombergQuint.
Now, we decided that rather than doing things in the realm of theory, we moved this (stake sale) forward where relevant kinds of financial institutions could become shareholders of the company.Gagan Banga, Vice-Chairman & CEO, Indiabulls Housing Finance
For now, Gehlaut continues to be classified as a promoter of Indiabulls Housing Finance. He will start the process of declassification over the next six months, after getting requisite regulatory approvals, Banga said.
"The desire is to make this a promoter-less financial institution with some large financial institutions becoming large shareholders and that's the direction we are headed in," he said.
The reorganisation started after the Reserve Bank of India's decision to reject a merger between Indiabulls Housing Finance and Lakshmi Vilas Bank in October 2019. While the regulator did not provide a reason for the rejection, some analysts questioned whether it indicates discomfort with the level of corporate governance at the company.
In January 2020, group company Indiabulls Real Estate Ltd. was sold to Embassy Group. The sale process is in its last stages now, Banga said. Then in August 2020, Gehlaut stepped down as the chairman of the housing financier. He will now exit as promoter while continuing to hold a near 10% stake.
In an emailed response on Tuesday, Gehlaut said that he will continue with Indiabulls Housing Finance only as a shareholder from hereon.
"The senior management team of Indiabulls Housing under leadership of Gagan (Banga) is very mature and seasoned, as a shareholder of Indiabulls Housing they have all my support and I have full confidence in their abilities to grow the business independently," Gehlaut said.
How Will Things Change For Indiabulls Housing Finance?
The expectation is that the ownership transition will help reduce the cost of funding for Indiabulls Housing Finance.
On Dec. 9, the housing finance company sought to raise debt worth Rs 1,000 crore through non-convertible debentures for tenors between two and five years. Depending on the type of investor and the tenor, the effective yield on these debentures ranged between 8.35-9.26%, according to disclosures by the company. This is about 350 basis points higher than the prevailing government bond yields of similar tenors.
Currently, Indiabulls Housing Finance is rated AA by Crisil Ratings.
With new investors on board, as well as improvement in leverage ratios and cost-to-income structures, Indiabulls Housing Finance hopes to improve its rating to AA+, Banga said.
According to the head of financial sector ratings at a credit rating agency, it is not clear what Gehlaut's exit will achieve. Since Gehlaut had sold his real estate ventures, concerns around conflict of interest were already taken care of, this official said, speaking on the condition of anonymity.
The presence of a promoter is an important indicator of support in times of need. It is not clear whether these financial institutions will help Indiabulls Housing if need for capital emerges in the future, this official said.
Alongside the reorganisation, the company will return to growth but avoid the trap to grow rapidly, Banga said. "Last year, we managed to raise Rs 5,000 crore worth equity capital, which will help us a lot. Going forward, we may consider another capital raise, or organically increase our size and scale."
The company is also growing its co-lending partnerships. It has tied up with seven lenders, including Central Bank of India, Housing Development Finance Corp., Yes Bank Ltd. and Canara Bank for the co-lending business.
These co-lending arrangements are still new. In September, Indiabulls Housing Finance disbursed loans worth only Rs 325 crore through co-lending arrangements. Through these partnerships, the company aims to disburse up to Rs 1,000 crore by October-December 2022, it said in an analyst presentation.
As of Sept. 30, the housing financier had a loan book of Rs 64,062 crore, with a gross non-performing asset ratio of 2.69%. The company is looking to close this financial year with assets under management of Rs 75,000 crore, which will further rise to Rs 90,000 crore next year.
We believe that from FY23 onward, we are geared for the type of growth we saw between 2009-2019, where we grew at a CAGR (compounded annual growth rate) of 35% across all financial parameters.Gagan Banga, Vice-Chairman & CEO, Indiabulls Housing Finance
According to Asutosh Mishra of Ashika Stock Broking, the decoupling from the promoter and their real estate business is a positive for Indiabulls Housing Finance. But whether things change materially for the company is unclear.
"They're talking about growing the co-lending businesses and grow assets under management through that. While it's true that AUM will increase, the actual assets on the balance sheet will only be a small portion of it," Mishra said. "We have to see how this will change the view on the company's financial position."
Moreover, private equity funds, whenever they enter a business, continuously push for higher growth. So it would be important to see how Blackstone's presence changes Indiabulls Housing Finance's own growth plans, Mishra said.
The Promoter's New Push
Once Gehlaut's exit is complete, the concept of an Indiabulls Group will no longer exist, Banga said. Gehlaut will shift focus to Dhani Services Ltd., a fintech and medtech focused company, which runs the Dhani mobile application.
Banga is a non-executive director on Dhani's board. As Gehlaut steps out of his promoter role at Indiabulls Housing Finance, Banga, too, will separate from Dhani, he said.
Through its app, Dhani provides personal finance, buy-now-pay-later, co-branded credit cards, tele-medicine, video consultations with doctors and investments.
In terms of scale, Gehlaut believes Dhani has a long runway. There are about 50 crore Indian borrowers seeking transaction finance, compared with just 6 crore credit cards in the market, he said.
"...we are trying to cater to these 44 crore customers who don't have any transaction finance power in their pockets through Dhani card that provides transaction finance to our customers for their daily needs whether online or offline," Gehlaut said.
The business plan is to start customer relationships with lending and other financial services and then move on to providing healthcare services through subscription, Banga said. "It is the desire of the management (of Dhani) to not grow net interest income but to grow fee income."
For the quarter ended Sept. 30, Dhani Services' total revenue from operations fell 16% year-on-year to Rs 334.7 crore. It had a net loss of Rs 206 crore, as compared with a profit of Rs 1.64 crore a year ago.
Mishra of Ashika Stock Broking said the digital lending space is increasingly crowded. "Whether it be digital finance or delivery of medicine, the segments are highly crowded right now," he said. "Eventually, only a handful will survive. We need to see how Dhani positions itself now."
Parijat Garg, a digital finance expert and former credit bureau official, sees this differently.
"The cost of acquiring a customer in digital finance is increasing since the customers have a lot of options available to them. So to subsidise cost, getting the customer on to a subscription model would make sense," Garg said. Moreover, healthcare on its own is under-penetrated and has growth opportunities. By providing financing options, the healthcare offering looks even better to the customers, Garg said.
Note: This story has been updated with responses from Sameer Gehlaut, which were received after the article was first published.