Reports indicate that India Bulls Housing Finance is looking to raise $500-600 million through a QIP, and that implies ~12% dilution. While higher capital levels could be a trigger for a positive credit rating review, we still do not see the need for dilution currently, with a Tier-1 of ~15% and high liquidity on its balance sheet (+15% of assets).
Since June 2015, valuations of IHFL have moved up from 2.0x to 2.7x FY17F book, just 10% lower than our target multiple (3x FY17F book of 237). While a successful QIP issue will likely make valuations look reasonable at 2.1x FY17F book, we would like to see steady state financial performance of the company over the next 12 months before expecting a further re-rating.
With most HFCs operating at 11-13% Tier-1 levels, and Indiabulls Finance already carrying +15% of its assets in the form of liquid investments, we do not see any reason for capital raising currently. We expected capital raising by end-FY17F.
Indiabulls is rated AA+ by Crisil and Icra, with a AAA rating by CARE. As it looks to move down the mortgage risk chain, we think AAA rating becomes almost necessary from a long-term perspective. Credit ratings depend upon the quantum of capital and liquidity on the balance sheet. While this can be one of the reasons to front-end the capital raising, its Tier-1 level of +15% and liquidity of 15% on its balance sheet is already one of the highest among HFCs and we don’t know whether this can trigger a ratings review.
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