Indiabulls Housing Finance Ltd (IBHFL) said its next target on the ratings’ front is to get an upgrade to ‘AA+’ from its current rating of ‘AA’ (stable outlook) to make the most of the macro-opportunity and to grow profitability.

In its annual report, IBHFL referred to rating agency Crisil revising its rating outlook to ‘AA’ (stable outlook) on March 31, 2021 from ‘AA’ (negative outlook).

This came on the back of the company’s success in raising equity capital during the current tough global macro-economic situation, it added.

According to Crisil, instruments with ‘AA’ rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.

Further,“+” or “-” suffix to a rating reflects comparative standing within a rating category.

As per the company’s past experiences, in times of macro-economic stress, whenever it has done an equity capital raise, even when capital adequacy was high – the company’s ratings were either upgraded or the rating outlook changed positively within a short period, the report said.

Capital raise

“The company believes that a capital raise aggregating up to $275 million...[approximately 12.5 per cent post issue diluted share capital of the company, assuming full conversion of existing Foreign Currency Convertible Bonds/FCCBs] would set its ratings on an upward trajectory and help it get its rating upgrade to AA+ much sooner than would be the case otherwise,” the report said.

IBHFL is seeking shareholders approval for issuance of securities of the company through Qualified Institutions Placement (QIP) and/or FCCBs and/or any other permissible modes aggregating up to $275 million or its equivalent in Indian rupees or in any other currency(ies).

In FY 2020-21, the company raised a total of ₹3,773 crores of regulatory equity capital + quasi-equity capital: ₹683 crore QIP issuance, ₹1,103 crore of FCCB issuance, and also accrued ₹1,987 crore by selling bulk of its investment in OakNorth Bank.

The annual report said an upgrade to ‘AA+’ rating opens up large pools of capital from institutions/companies such as insurance companies and pension funds, which as per their investment guidelines can’t invest meaningfully in papers rated below AA+.

Moreover, insurance companies and pension funds have a longer investment horizon, which improves liability term matching with IBHFL’s long maturity assets and thus bodes well for its Asset-Liability Management, it added.

Cost of funds reduction

The company estimated that an upgrade to ‘AA+’ will reduce its cost of funds by about 50 basis points. One basis point is equal to one-hundredth of a percentage point.

“Based on our present borrowing level, the reduction in cost of funds and the increased equity component will translate to a gain of about ₹325 crore at the PBT (profit before tax) level, which is about 20 per cent of FY2020-21 PBT.

“The RoA (return on assets) will also rise substantially and, despite the approximately 12.5 per cent dilution, the RoEs (return on equity) will rise appreciably,” the report said.

As part of IBHFL’s asset-light growth model, it has entered into co-lending agreement with HDFC, Bank of Baroda and Central Bank of India for sourcing home loans and with RBL Bank and Central Bank of India for sourcing secured micro, small and medium enterprise loans.