IIFL Finance dilutes 20% stake in home finance subsidiary

IIFL Home Finance (IHFL) is raising Rs 2,200 crore from Abu Dhabi Investment Authority (ADIA) for 20% stake.

Key points to note – 

• IHFL is currently a 100% ‘unlisted’ subsidiary of IIFL Finance Limited (IFL)
• It is in the business of small-ticket (affordable) home loans, loan against property and construction finance.
• The subject fund raise of Rs 2,200 crore
  • is fresh capital infusion into IHFL;
  • values IHFL at Rs 11,000 crore; and
  • is targeted towards expanding the business into new markets
• As at March 31, 2022, IHFL had assets under management (AUM) of Rs 23,617 crore on an active customer base of 1,68,000

Is this transaction a major achievement for IFL and IHFL?

Given the numbers involved – Yes – in terms of the money raised as well as the valuations.

So does it make IFL a tempting buy now?

Many people are wondering this, given that IHFL in this transaction alone has been valued at Rs 11,000 crore as against IFL’s total current valuation of approx Rs 12,500 crore.

• After-all, Home Finance Subsidiary is just one segment of IFL’s business. IFL also does gold loans, business loans, micro finance and capital market finance.
• IFL’s total AUM across businesses was Rs 51,210 crore as on March 31, 2022. IHFL out of this was Rs 23,617 crore i.e.,  about 46% of the total.
• To keep it simple – given that 46% has been valued at Rs 11,000 crore, the total should be worth approx Rs 24,000 i.e., almost double of the current market cap.

Above is a question everyone is wondering and given that the margin of error (of going wrong in valuations) seems big enough, majority feels a reasonably good upside in IFL’s stock due to the transaction.

My points of cautions here –

• Don’t take ADIA’s investment as any benchmark for calculations. It’s for a significant stake and from long term perspective. Such transactions normally happen at significant premium and hence may not be reflective of the true value of the home loan subsidiary.
• Your liking for IFL’s stock should be independent of ADIA’s investment and should be purely based on business dynamics of various segments that IFL operates in.

Major investments by long term financial/ strategic investors always create initial euphoria in a stock. However, it fades faster than most of us expect and then it’s back to business as usual.