DHFL crisis: How the housing finance giant's fortunes took a downward turn

A strong brand in tier-II and lower cities, DHFL was an AAA-rated company till February 3, when it was downgraded to AA+ by CARE Ratings. A series of downgrades has eroded its stock by half since then

With CRISIL, Icra, and CARE downgrading the papers of Dewan Housing Finance (DHFL) to ‘D’, or default grade, India’s third-largest mortgage finance company is finding itself in an unenviable spot that it may not have imagined even a year ago.

While CRISIL and Icra downgraded the short-term ratings, CARE also followed suit to downgrade DHFL's long-term ratings to D. Even CARE Ratings downgraded the long-term credit of DHFL to D.

Exactly a year back, in fact, the then Lord Mayor of London Charles Bowman was “delighted” to welcome Kapil Wadhawan, chairman of Wadhawan Global Capital, to Mansion House “to discuss London, India and innovation.”

A strong brand in tier-II and lower cities, DHFL was an AAA-rated company till February 3, when it was downgraded to AA+ by CARE Ratings. On May 14, however, the company’s long-term rating stood at BBB-, which is a junk rating.

The firm received wind on its sail after Prime Minister Narendra Modi announced the housing-for-all project and affordable housing became a big business opportunity. 

The company’s 352 branches are mostly concentrated in tier-II and tier-III cities where it remains a major brand for customers with an average ticket size of Rs 15 lakh. At the group level also, the company was on an expansion spree, hiring 33 top executives of ICICI Securities Private Wealth Management for its own wealth management arm in September, 2018.

On September 21, for reasons not known, the DHFL stock was hammered 60 per cent, on concerns of a liquidity crisis in the NBFC space in general and DHFL in particular, after the IL&FS defaults in August last year.

To top it, investigative website Cobrapost alleged that the company’s promoters siphoned off funds to invest in the real estate business, and even to buy a Sri Lankan cricket team.

The company put up a brave face after that, fiercely denying any allegation of wrong doing, or siphoning off funds, and assuring its investors that all their dues will be honoured on time. Since then, the company sold its portfolio to alternate investment firms, sold its affordable housing arm, and tried to find a strategic partner for its holding firm.

“The company has sufficient cash reserves and investments today, equivalent to about Rs 4,500 crore,” Wadhawan had said in March.

However, on May 21, DHFL said it won’t allow pre-mature withdrawal of deposits. On June 4, the company went one step further and said it would delay paying its Rs 1,000 crore-plus obligation to debenture holders. Although technically one-day delay is considered a default, the company is seeking to avoid that tag by leaning on a seven-day grace period clause. Wadhawan has communicated to the market that he would be paying back the money by Monday.

CRISIL and Icra, of course, did not wait for that to happen. Even as the non-convertible debentures (NCDs) are not rated by CRISIL, the agency thought it fit to assign D rating to the company’s outstanding commercial papers worth Rs 850 crore on liquidity concerns. Of the total outstanding, Rs 750 crore is scheduled to mature in June, with the first due on June 7, or Friday.

Wadhawan, aged 44, is leading the fire-fight to save the company from total collapse.  DHFL, founded by Wadhawan’s father, is in hectic negotiations with banks to raise funds by selling its portfolio assets. Wadhawan took charge as chief executive officer (CEO) in February this year after its previous CEO Harshil Mehta quit.

According to the annual report, for the year ending March 31, 2018, Wadhawan’s salary grew to Rs 3.9 crore from Rs 3.2 crore as on March 2017. The Wadhawan family currently owns 39 per cent stake in DHFL, or Rs 1,366 crore as on Tuesday’s closing price of the stock. The share price of the company has lost 55 per cent of its value since January.

Wadhawan, who studied MBA in Edith Cowan University, joined the company at the age of 27 after the untimely demise of his father. Since then, Wadhawan was instrumental in acquiring Deutsche Postbank Home Finance for Rs 1,079 crore in March 2011, and was quite aggressive in expanding the company. In 2011, Wadhawan won the EY entrepreneur of the year award.

DHFL’s independent director Vijaya Sampath quit in February this year citing personal reasons as per exchange filings. On March 11, another independent director, VK Chopra quit the board. DHFL has since then been aggressively shedding its non-core assets, and selling assets from its portfolio. On May 21, the company assured its investors that it stood committed to honour all of its liabilities “and demonstrated this by repaying liabilities amounting to approximately Rs 30,000 crore since September 2018, without a single day’s delay.”

The rating agencies, however, are sure that DHFL’s collection facility has not been not impacted, and bad loans remain low.

The company’s capital position was modest. Reported net worth and capital adequacy ratio were Rs 10,750 crore and 17.74 per cent, respectively, as on December 31, 2018, CRISIL noted. However, reported gearing was 9.3 times, while gearing adjusted for securitisation remained high at 12.1 times.

“Return on managed assets, though stable at 1.3 per cent during the first nine months of fiscal 2019, was lower than that of its peers (reported return on assets was 1.4 per cent), primarily because of intense competition, resulting in low spreads and high operating expenses on account of large branch network and small ticket size of loans,” said CRISIL.

However, DHFL is a strong brand, being in the housing finance business for more than 30 years. On a standalone basis, it had assets under management of Rs 1.26 trillion as on December 31, 2018.

While the asset quality remained healthy, with gross NPA ratio at only 1.12 per cent of advances, CRISIL said this could need a re-evaluation. The average ticket size was at a low Rs 15 lakh.

“While current delinquencies are not high, if the funding situation for non-banks does not stabilise over time, asset quality challenges could manifest,” CRISIL said.