Cobrapost allegations compound DHFL's woes in the wake of NBFC crisis

First victim of the NBFC crisis, the company's m-cap already down by 60% since September

Dewan Housing Finance Corporation (DHFL) was the first victim of the liquidity crisis triggered among non-banking finance companies (NBFCs) in September. Since then, its stock price has seen an erosion of 60 per cent. To top it, Tuesday’s charges made by media outlet Cobrapost, post-market hours, took DHFL’s stock price down by another five per cent.

While the company has indicated that the allegation of Rs 31,000 crores’ worth of financial fraud levied by Cobrapost is baseless, Suresh Ganapathy of Macquarie Capital says that the real issue is that of trust and lack of confidence. “The lending markets will freeze for NBFCs and they will have a difficult time raising money. Given the worry in the market, any contagion will have a bigger effect,” he said.

For DHFL, this is the biggest worry. Its net profit declined over 37 per cent year-on-year in the December quarter (Q3) as loan growth staggered. Fresh loans disbursed in Q3 declined by 95 per cent year-on-year. At Rs 507 crore, disbursals were the weakest in three years.

Securitization or loans sold down to raise funds was at its peak at Rs 11,900 crore. With off-balance sheet loans forming part of 24 per cent of DHFL’s Assets Under Management (AUM), it needs to be seen how well the housing financier balances growth and profitability going forward. The increased share of sell-down loans already dragged its total AUMs down by three per cent sequentially in Q3.

As an immediate boost to liquidity, it hopes to garner Rs 1,500 crore every month by way of selling down loans. In the long-term, it plans to meet 35-40 per cent of its funding requirements through this route. The company has already planned for lower growth in the year ahead as compared to the past. Disbursement growth will be driven by the pace of securitization, according to the management. Whether this strategy will alter its profitability needs to be seen. DHFL incurred a loss of about Rs 40 crore (on assets worth Rs 1,700 crore) in its latest tranche of securitisation to Oaktree Capital.

As for its loan book profile, retail housing loans account for 57 per cent of its books, while the share of builder loans and loans against property (LAP) stand at 17 per cent and 21 per cent respectively. On the latter two segments, DHFL’s share is relatively high compared to its peers, though it plans to reduce the share of developer loans to five per cent by the end of FY19.

On Wednesday’s investor call, an analyst from a domestic brokerage pointed out that some of the developers to whom DHFL has extended loans do not have positive net worth. Edelweiss Securities turned cautious on DHFL’s builder and LAP loans post the Q3 results. Therefore analysts say that any threat to asset quality will further deteriorate DHFL’s valuations.

DHFL plans to raise Rs 2,000 crore by March 2019 to meet its short-term liabilities. Divesting its non-core assets such as low-cost housing finance (Aadhar Housing Finance), NBFC (Avanse Financial Services), and its life insurance business and asset management company will be key.

Given these concerns, experts say that even if valuations are undemanding at 0.7xFY20 book, inves­tors should remain cautious. Many believe the road to recovery may be tough and painful for DHFL.