Why the bid war for DHFL may well end up being a curse for the winner

Establishing a greenfield HFC may be cheaper for the bidders than picking up one embroiled in fraud probes

As the race for beleaguered housing financier Dewan Housing Finance Corporation (DHFL) nears the last lap, whether Adani Capital or OakTree, or Piramal Enterprises gets lucky will be known soon. But here’s the interesting thing.

Going by reports, DHFL may be mopped up for over Rs 30,000 crore — easily twice the money initially offered, which makes the bidding war tough to grasp.

The Central Bureau of Investigation, Enforcement Directorate and Serious Fraud Investigation Office are scrutinising its financials for fraud. In September, Sebi pointed at serious concerns over the authenticity and reliability of DHFL’s financial statements. While the lender has Rs 17,000 crore of retail assets and land parcels in Juhu, Borivali, Worli, and Chembur in Mumbai, there may be a disconnect between the quality of DHFL’s books and the value bidders ascribe to it.

For OakTree and Adani Capital, acquiring DHFL ensures the much-needed prominence. Even for Piramal, as Citibank analysts say, the DHFL buyout would increase the share of its retail loans from 11 per cent to over 40 per cent.

But at what cost is the question. Neck deep into investigations, DHFL is working at less than a tenth of its prime workforce strength. Hence, the initial investment that a successful bidder would have to deploy to reach out to DHFL’s customers and ensure an improvement in collections would be a tough ask. “The buyer will have to relegate the negative image of DHFL, spend on rebranding and marketing, which will be time-consuming and expensive,” says Ajay Bodke, an independent market expert.

Moreover, in FY20,  DHFL’s gross non-performing assets (NPAs) shot up to over 20 per cent and continued to increase in FY21, though Kajal Gandhi of ICICI Securities ascribes it to the moratorium. Only 29 per cent of its customers availed moratorium, according to DHFL’s exchange filing. Assuming a bounce back, the probable delinquencies will still remain at a higher-than-acceptable level for a housing finance company (HFC). “The cost of setting up a greenfield HFC will be cheaper. At least the base will be predictable, strong and litigation-free,” says a fund manager, while questioning if it’s worth paying the price for a head-start.

India’s limited success with a turnaround, particularly when assets are bought for land banks (for example, IL&FS bailing out Satyam’s troubled realty arm, Maytas Infrastructure), makes the bidding war more incomprehensible. Bodke also cites that asset reconstruction companies themselves haven’t had many breakthroughs with business turnarounds.

In a regulated lending business where brand perception is important for procuring and lending money, the capital burn and/or debt procurement rate may be way higher than the average in the initial periods for DHFL’s buyer, which can also tilt the scale in favour of organic building up of retail loans.

So, will DHFL end up as a winner’s curse, 2021 will decide.