DHFL tanks 16% after rating downgrade; what should investors do?

Experts speaking to Moneycontrol advise selling the stock as well as staying away from such companies unless some big company buys it

Dewan Housing Finance Corporation shares fell 16 percent to hit five-and-half-year low on June 6 as rating agencies downgraded the rating on commercial paper after the company defaulted on debt repayment.

The stock dropped into double-digit levels for the first time since February 4, 2019, and hit an intraday low of Rs 91.50, the lowest level since December 2013.

It has lost 86 percent of its value from the record high of Rs 690 touched on September 3, 2018. It closed at Rs 93.90, down 15.86 percent on the BSE.

Yes Bank and IndusInd Bank, which have loan exposure to DHFL, also cracked 6-7 percent.

Domestic rating agencies ICRA and Crisil, on June 6, downgraded the rating on Rs 850 crore worth of commercial paper of DHFL to 'default' from 'A4' due to the mortgage lender's deteriorating liquidity condition.

The rating of the company, which defaulted on a debt repayment on June 4, has been removed from the watch with negative implications by both the rating agencies.

The net asset value (NAVs) of mutual funds that have exposure to DHFL debt papers fell sharply on June 4 after the company defaulted on repayment.

The mortgage lender is dependent on the refinancing of maturing liabilities, given the relatively long tenure of the loans in the housing finance industry.

To make debt repayment and improve liquidity, the housing finance company, which is in a dire situation, is expected to meet SBI-led lenders’ consortium on June 6, reports CNBC-TV18 quoting sources.

The business channel has learned from sources that DHFL may look to sell part of the portfolio to banks for Rs 1,500 crore. Company's total outflow, so far, in June was at Rs 5,500 crore against the inflow of Rs 4,000 crore

Reports suggested that DHFL has received approval from RBI for sale of Avanse Finance to global private equity firm Warburg Pincus and the transaction is expected to be completed shortly. The company is expected to receive Rs 800 crore from Avanse deal.

Another deal that is expected to create funds for the company could be Aadhaar deal with Blackstone, sources said, adding the global private equity firm is likely to pay around Rs 2,500 crore for the deal.

Hence, experts advised selling the stock as well as staying away from such companies unless some big company buys it.

Here we have collated experts view on DHFL after debt repayment default:

Sameer Kalra, Founder & President of Target Investing

As it was already getting difficult for the company to meet its debt obligations, the recent non-payment of the bonds has just opened the company to even worse liquidity situation.

Even though it might be able to meet its obligation by proceeds from Aadhaar Housing sale, further debt obligations will become more difficult. We have a sell rating on the company.

Manali Bhatia, Senior Research Analyst at Rudra Shares & Stock Brokers

As it missed the interest payment on NCDs, it is very difficult to meet the next line up of outstanding, which is around Rs 6,200 crore in next two months (Rs 750 crore of commercial papers on June 7). In last month also, it stopped the FD withdrawal.

In short, the company is facing a huge liquidity crunch and for fund-raising, all doors look closed except stake sell in the company and its subsidiaries. They already sold stake in subsidiaries i.e. Aadhaar Housing Finance (NHB already gave prior approval for stake sale to Blackstone controlled BCP -Topco and is expected to complete by June 10-11) and Avanse Financial Services to Warburg Pincus.

DHFL is expected to pay the dues after June 11. Now, promoters hold 37.21 percent stake in the company. They are already in talks with some major players to sell their stake in a month.

Hence, we suggest staying away from DHFL until or unless any big player buys the company.

Sumit Bilgaiyan, Founder, Equity99

DHFL from September 24, 2018, to December 31, 2018, repaid Rs 17,900 crore of borrowings including Rs 10,000 crore of commercial papers. On the other hand, the company raised Rs 16,300 crore of fresh funds over the same period out of which nearly Rs 11,900 crore came in from portfolio sell down (securitization).

The company is a focused player on low-ticket housing for non-salaried and self-employed. The company had planned to target a portfolio sell down of Rs 1,500 crore per month and increase the share of its off-balance sheet (securitized loans) AUM to 35-40 percent over the next few years from 24 percent of AUM as of Q3FY19.

As of May 2019, the management of the company was focused on the induction of a strategic investor and securitization of non-housing loan exposure. But failure on the part of the company to get adequate funding from securitization has been the single most reason for the company’s inability to repay the loans, we advise investors to sell this stock at current levels.

AK Prabhakar, Head of Research, IDBI Capital

With so much of trouble, an investor would be better off staying away from the stock. Housing finance as a sector is unattractive as cost of funds and increased competition from banks.

Housing finance now runs a risk of lower margin and negative growth.

Sanjiv Bhasin, EVP-Markets & Corporate Affairs, IIFL

At a time when global yields are hitting 2.1 percent—the lowest in 2 years— and also followed by Indian 10-year yield trading at 7 percent, the debt repayment default tells the void created by the IL&FS misdemeanor & the contagion on asset-liability mismatch by NBFCs.

Stock could fall but a large part of the news is already priced in.

The short term bailout is on the cards as stronger hands can buy out promoter stake. We could see a slow death like in the case of Jet Airways.

The buyout by Blackstone is imminent as the cash strapped company is in dire needs due to asset-liability mismatch

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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