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Last Updated : Jul 17, 2019 05:30 PM IST | Source: Moneycontrol.com

Who will feel the heat if DHFL fails to find a strategic investor?

Neha Dave @nehadave01

Highlights:
-DHFL reports huge loss in Q4 FY19
- Scouting for strategic investor
-Needs fresh capital and funding to stay afloat
-Total liabilities around Rs 98,000 crore, public sector banks most exposed
-Mutual funds and pension firms also have sizeable exposure

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 Dewan Housing Finance (DHFL) reported a huge standalone net loss of Rs 2,223 crore due to high provisioning as it marked down loans in Q4 FY19. Consequently, for the full year ending FY19, the housing finance company (HFC) reported a net loss of Rs 1,036 crore compared to net profit of Rs 1,240 crore in FY18.

The HFC has been in turmoil since September 2018.  It all started with default by IL&FS group companies in September last year triggering the liquidity crisis. DHFL’s funding crunch aggravated as its commercial paper (CP) was sold at a discount by one mutual fund house. The woes for the lender did not end there. The allegations of media outlet Cobrapost led to bruising collapse in the DHFL stock price.

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Housing constituted 57 percent of DHFL’s loans. Around 21 percent of lending was towards loans against property (LAP), 17 percent for project loans and 5 percent for loans to small and medium enterprises (SMEs) as of December-end 2018.  The lender’s exposure to non-housing loans has been the cause of concern.

While DHFL managed to make repayments of over Rs 41,800 crore so far primarily through securitisation of assets and repayment collections since September 18, its financial situation has turned grim indicating it may not survive. The significant slowdown in disbursement and loan growth post September 2018 have strained the financials of the company.

DHFL’s FY19 earnings, which were unaudited, have brought to the fore several issues, including stressed loans and inadequate capital. According to National Housing Bank (NHB), DHFL’s FY18 capital adequacy ratio stood at 10.24 percent, much lower than its own assessment of 15.29 percent and the regulatory minimum of 12 percent.

Following the results and report of a default in interest payment to non-convertible debenture (NCD) holders, the stock nosedived yet again this week losing more than 20 percent. The series of negative news, including the downgrade of its credit rating to default category, have caused around 90 percent fall in market value of the stock over the last one year.

Equity investors in the company have taken the beating so far. Creditors are now feeling the heat as the recent developments raise a significant doubt on the ability of the company to continue as a going concern.

According to the exchange release, the company is at an advanced stage of submitting its resolution process under the inter-creditor agreement (ICA) as entered into by banks. The ICA will examine and firm up the terms of the resolution process by July 25 and make it operational before September 25. Meanwhile, DHFL is in the process of identifying a strategic investor.

In absence of fresh capital infusion, the fourth-largest HFC with assets under management of Rs 1,19,992 crore as of March-end 2019 may find it difficult to stay afloat. Such a scenario will send ripples across the financial sector, including banks, mutual funds, insurance companies and pension funds. While a lot hinges on the resolution outcome and amount of haircut, it is important to know the most exposed entities.

Banks most exposed to DHFL

As of March-end 2019, DHFL’s total liabilities stood at around Rs 98,000 crore. The latest available data of mix of liabilities is as of December-end 2018 and banks’ exposure to DHFL would be roughly around Rs 40,000 crore.

DHFL liab

While we don’t have the latest bank-wise loan exposure to DHFL, the NCD prospectus dated 14 May, 2018 has given the bank wise exposure as at end March 2018. Public sector banks are most exposed while private banks total lending to DHFL is limited.

laons to dhfl

Wider holding of DHFL’s debentures

DHFL has been active in fixed income markets raising funds through debentures, commercial papers and masala bonds. So, apart from banks, various market participants like insurance companies, mutual funds and pension funds also have sizeable exposure.

DHFL dedtholders

In addition to mutual funds, some private banks (Yes bank and IndusInd bank) are also on the list of debenture holders of DHFL. All these entities will be adversely impacted if the resolution involves a significant haircut.

That said, induction of strategic investor and infusion of the fresh capital can give a new life to DHFL and more importantly, some respite to these lenders.

For more research articles, visit our Moneycontrol Research page

Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here

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First Published on Jul 17, 2019 11:26 am
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