InvestorQ : Is it true that Dewan Housing Finance is having major problems? The stock price has been correcting sharply in the last 1 year?
Anjana Aiyar made post

Is it true that Dewan Housing Finance is having major problems? The stock price has been correcting sharply in the last 1 year?

Arya Nanda answered.
1 year ago

Dewan Housing is one of the companies but currently the most prominent name that is having problems. IL&FS is already a well known problem and the government has already removed the old board and replaced with a professional board in place. It is said that the stock market is the best barometer of what is going wrong with the company and you can gauge this by looking at the chart that captures this falling trend in NBFC stock prices and the value they have destroyed.

Only 3 companies have been considered in this chart that lost tremendous value for almost similar reasons. In all the cases, the companies had run out of liquidity due to a major problem of maturity mismatch. Basically, they were borrowing in the short term money market and lending for long term purposes like housing, realty projects and infrastructure projects. The model worked perfectly as long as the short term money markets were not tight. When the RBI hiked repo rates last year, the impact was first felt by IL&FS which started defaulting. Then IL&FS became the problem as short term liquidity became tighter, lenders became reluctant and cost of funds moved up triggering the NBFC crisis. That was where the problem actually started. But, while some NBFCs like Bajaj Finance or LIC Housing Finance have not really been impacted by these problems, the problem has been most acute with respect to Dewan Housing Finance. You need to understand the Dewan Housing problem in slightly greater detail.

On June 04th Dewan Housing defaulted on its interest payment to debenture holders to the tune of nearly Rs.960 crore. The stock was downgraded by CRISIL and ICRA to Default Status (D Rating). Dewan Housing has a bigger problem of what it may have to do next month. For example, it has also put its next month cash flows at risk. For July 2019, DHFL has an estimated inflow of Rs.2,200 crore and a committed outflow of Rs.6,200 crore. That could most likely lead to another default by the company. The problem is that Dewan Housing has borrowed close to Rs.1,00,000 crore from banks, mutual funds and pension funds and a default status will mean that all these lenders will have to make huge provisions on their investments. While banks will have to take a hit on profits, mutual fund NAVs gets hit. You may be aware that UTI Mutual Fund has already written off 100% of its Rs.1200 crore exposures to Dewan Housing debt across its various schemes and more MFs may follow suit.