Focus on reducing corporate exposure
* PAT of INR8.0b was 3% below our estimates. The marginal miss was on account of slightly higher credit costs and taxes.
* Disbursements were steady at 4QFY19 levels of ~INR75b. During the quarter, the company focused on reducing its commercial real estate (CRE) exposure due to the impending LVB merger. It got INR60b of CRE loans refinanced. As a result, overall AUM declined 6% QoQ/ 10% YoY to INR1.13t. Management targets to step up disbursements to INR100b, 2QFY20 onwards.
* Spreads declined ~20bp YoY to 3.12%, largely due to 100bp rise in cost of funds. AUM mix incrementally migrated towards retail loans (incl. LAP), the share of which stood at 84% v/s 83% QoQ and 79% YoY.
* During the quarter, the company paid down almost all its CP (share down from 4% to 1% QoQ). Also, due to the comfortable liquidity situation (INR285b liquidity on the balance sheet), IHFL assigned only INR15b of loans during the quarter, recording an upfront income of INR480m.
* During the quarter, IHFL recovered INR7b from Palais Royale. Since floating provisions are not allowed under Ind-AS, in order to utilize the Palais Royale provisions that were reversed, management classified certain assets as Stage 3 and utilized those provisions against them. These assets include small real estate exposures coupled with exposures to the Essel Group and Café Coffee Day. As a result, the GNPL ratio increased 60bp QoQ to 1.47%. The company increased its PCR by 300bp sequentially to 25%.
* LCR for the company amounts to 550%+, significantly above the RBI’s proposed requirement.
* Update on LVB merger – Company received approval from CCI in Jun’19. Application for the merger has been made to the RBI, the BSE and the NSE.
Valuation and view: Over the past three quarters, IHFL has handled the liquidity situation well. It curtailed disbursements and focused on raising money via several sources, especially selldowns, while maintaining margins at the same time. We expect FY20 to be a year of consolidation – AUM is likely to be largely flat as the company focuses on reducing corporate exposure. However, the announced merger with Lakshmi Vilas Bank (LVB) is awaiting the RBI and other regulatory approvals. Our estimates are yet to factor in the impact of the merger, which we will do post receipt of all approvals. Hence, we retain our ‘Under Review’ rating on the stock.
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