The Indiabulls Group Is Refurbishing Itself

Last week, Sameer Gehlaut stepped down as executive chairman from the board of Indiabulls Housing Finance Ltd., while continuing as a non-executive and non-independent director. He was replaced by career banker and former deputy governor of the Reserve Bank of India, SS Mundra.

Along with the change in the leadership deck, the company is planning to raise funds.

A $300-million qualified institutional placement is planned within the next two months, after which the company may look at a preferential issue within the next six to nine months to attract private equity capital, a person familiar with the group’s strategy said on the condition of anonymity.

Gagan Banga, the company’s managing director, declined to comment on the group’s equity fundraising plans but said the non-bank lender will remain focused on staying liquid and highly solvent. Since the start of the crisis at the NBFC nearly two years ago, Indiabulls Housing has raised around Rs 45,000 crore, he said in an emailed response.

“We will continue to strengthen the governance framework under the guidance of our non-executive chairman SS Mundra, and evolve our well tested risk management framework to remain among the largest mortgage and micro-small-medium enterprise lenders in the country,” Banga said.

Bank or No-Bank?

The management changes and the fundraising plans follow two unsuccessful attempts by Indiabulls Housing to transition into a bank.

The group first applied for a banking licence, along with 25 other applicants, back in April 2013. But its application was rejected. While the RBI does not officially provide a reason for the rejection, it was believed that the group’s real estate exposure may have tilted the scales against its application.

Over the next few years, the group reduced its real estate exposure.

In April last year, it pitched a plan to merge with Lakshmi Vilas Bank through a share swap deal, wherein the promoters of Indiabulls Housing would hold a 19.5% stake in the merged entity. Gehlaut had told shareholders, in the company’s annual report for 2018-19, that the next frontier of growth for the company would be to transform into a bank as it was a “natural evolution”.

The RBI rejected that plan in October 2019.

Banga told BloombergQuint that Indiabulls Housing now intends to stick to its core housing-finance business with a stronger focus on digital platforms.

Tougher Run For Non-Bank Lenders

As a non-bank lender, however, Indiabulls Housing will need to continue to weather tough bond markets, which remain wary of lenders exposed to the real estate sector.

A flush of liquidity has brought down rates for some non-bank lenders. However, the likes of Indiabulls Housing and Piramal Enterprises, which have material exposure to developer loans, have seen high funding costs continue.

In May this year, Indiabulls Housing raised Rs 1,030 crore worth of bonds at a coupon rate of 9.1% for a three-year period. This was at a credit spread of over 433 basis points over the corresponding government security.

Banga said the company will continue to reduce its focus on developer loans.

As on March 31, 2020, the HFC had around Rs 13,880 crore worth of developer loans on its books, which accounted for about 15% of its total loan assets.

Indiabulls Housing plans sell down around Rs 7,000-8,000 crore worth of developer loans by the end of this calendar year, the person quoted earlier in the story said. The company is looking to move some of the developer loans to an Alternative Investment Fund platform, where other investors will be brought in, this person said.

Market perception of Indiabulls Housing may have also been dented by the RBI’s rejection of the proposed Indiabulls Housing-Lakshmi Vilas Bank deal.

A banking analyst said on the condition of anonymity that by bringing in a career banker and former regulator, the company can overcome any perception issues in the market.

Not everyone agrees it will be that easy.

A credit rating analyst, who spoke on condition of anonymity, said unless and until there is a change on the ground and the new chairman can bring in changes to functioning of the company, the perceptions over governance issues will remain.

Switching Focus To Indiabulls Ventures

Apart from the change within Indiabulls Housing, the broader group is also shifting strategy. Part of this has been the sell-downs from the listed real estate business.

In early 2018, Indiabulls Real Estate sold a part of its stake in prime commercial properties in Mumbai and Gurugram to Blackstone. In September last year, it sold its entire stake in a set of properties to the private equity firm. And in January this year it struck a deal to merge certain residential and commercial projects with the Embassy Group, which is backed by Blackstone.

By the end of these deals, the listed real-estate arm has been left with a handful of residential and commercial properties, of which 3 million square feet of projects are completed and 28.9 million sq ft of projects either near completion or under development, according to the latest investor presentation.

Gehlaut continues to be the chairman of Indiabulls Real Estate and has a 0.26% direct stake. The promoter group, including several promoter entities, have a 23.4% shareholding in the real estate entity, according to the BSE.

The promoter focus is now shifting to another group entity, which currently has a diverse set of units under it.

In a stock exchange notification on Aug. 12, the company said that Gehlaut will now be focusing on growing the finance and healthcare business at Indiabulls Ventures Ltd. as its chief executive officer.

Indiabulls Ventures, a listed company, has around 15 subsidiaries. This includes Indiabulls Consumer Finance, Indiabulls Securities Ltd., Indiabulls Investments Advisors Ltd, Indiabulls Asset Reconstruction Company Ltd, among others.

In the last fiscal, the finance and lending business of Indiabulls Ventures contributed around 84% to the group’s consolidated revenue and 25% of its total profits, compared to 78.5% of revenue and 83% of profit in the previous financial year.

Through Indiabulls Ventures, the group aims to build a fee income-based ecosystem combining financial services, healthcare and investing services through a mobile-based application called ‘Dhani’, the company’s annual report for 2018-19 said. The annual report for 2019-20 is not available.

“We originate and sell loans to third parties and therefore don’t require growth capital to serve our growing customer base. We don’t intend to do any secured loans in future and therefore the secured loans will run off over time,” Indiabulls Ventures said in a recent investor presentation.

The Dhani app, which had over 48 lakh monthly users as of March 2020, offers a payment wallet, personal loans, credit lines, business loans, medical loans and vehicle loans, the presentation said.

In addition, the group is building out its unsecured lending business housed in Indiabulls Consumer Finance. Around 77% of Rs 7,406 crore in loans disbursed the company in FY20 were unsecured, up from 51% in the previous year.

Indiabulls Ventures is focused on building a finance and healthcare ecosystem through the app, going beyond just lending. It will have a very low-cost model and Gehlaut is going to spend all his energy on developing the technology and the various services, said the person familiar with the groups’ strategy quoted earlier.

In the last month, the Indiabulls Ventures stock has risen 50% versus a 2% gain the benchmark Sensex.