NBFC liquidity crisis: DHFL slides; Rakesh Jhunjhunwala loses 32% in 3 days - Should you too worry?

The Dewan Housing Finance Corporation imited (DHFL) has disappointed the ace investor Rakesh Jhunjhunwala. DHFL which is still trying to recover from the impact of NBFC liquidity crisis buzz in its share price last year, now the housing finance service provider is trapped in another scandal which involves a news firm accusing the company for a behemoth Rs 31,000 crore fraud. While if you thought this is extremely bad for DHFL, then to bring at your notice, the company is already struggling in its financial performance. All combined have definitely created a hay-way among investors, which has taken a toll on their wealth. In losing money from DHFL, one can admit Jhunjhunwala would be a lead retail investor. Even the big bull of Dalal Street has shown signs of losing faith in DHFL. 

At around 1414 hours, the share price of DHFL was trading at Rs 164 per piece down by Rs 6.40 or 3.76% on BSE. However, the stock has already plunged by nearly 10% so far in the trading session, after it touched a new all-time low of Rs 153.5 per piece 

Notably this would be DHFL’s third consecutive bloodbath. From January 28 to till date, DHFL has given away nearly 32% of its market price, making investors including Jhunjhunwala poorer at certain level. By end of last week’s trading session, DHFL’s pricing stood near Rs 222-level.

How the matter went out of control with DHFL?

It all began from January 25, when late afternoon DHFL announced its December 2018 (Q3FY19) result. What was interesting to note was a clarification made by DHFL in case of an allegations by investigative news agency CobraPost which claimed that promoters of this NBFC have created a fraud of Rs 31,000 crore. 

DHFL hit back  on the accusation saying, “This mischievous misadventure by Cobra Post appears to have been done with a mala fide intent to cause damage to the goodwill and reputation of DHFL and resulting in erosion in shareholder value.”

A background check: DHFL received an email at around 0844 hours of January 25, with- a follow-up reminder one hour later, seeking answers to 64 questions from Cobra Post, many of which were laced with political innuendos.

DHFL expressed shock and surprise to receive this inquiry this morning, although Cobra Post had announced its press conference last Friday, i.e. 25 January 2019, to disclose an alleged financial scam. 

“One would have expected as a responsible media house CobraPost would have asked these questions during their investigations and not on the day of the press conference.Their entire approach raises serious concerns about the motivation of this so-called expose,” said DHFL. 

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Despite every effort from DHFL rubbishing the allegations, investors seem to be least interested in what the NBFC had to say as they continue to remove their money. Notably this recalls the same situation in DHFL last year, when its glorious over Rs 690-market price was tampered due to news over its exposure in IL&FS crisis. 

Another reason could be due to downward trend in Q3FY19 earnings. During this quarter, DHFL posted net profit of Rs 313.60 crore which was down by massive 36.70% from Rs 495.44 crore in Q3FY18. On the other hand, DHFL’s revenue from operations grew by 12.33% to Rs 3,250.94 crore in Q3FY19 versus Rs 2,893.98 crore in Q3FY18. 

Coming back to Jhunjhunwala, he has already shown sentiment of sellings in DHFL share price. The ace investor trim down his holding by 0.73% in DHFL. He now holds 2.46% in the company with 7,728,500 equity shares which are now Rs 133.2 crore. Earlier, his wealth in DHFL was between Rs 300 to Rs 600 crore. According to TrendLyne.com data, Jhunjhunwala’s wealth in DHFL has declined by 32% this month, by 21.53% in three months period and by a massive 73.44% drop in past six months. 

This brings the question, should we invest in DHFL shares? 

Kunal Shah and Prakhar Agarwal, analysts at Edelweiss Securities sees the road to recovery to be arduous for DHFL due to three factors. 

They are - a) incremental funding (availability and cost) is unlikely to come through easily, leading to continued contraction in on balance sheet book and modest AUM growth; b) transition to retail focus and a cutback in project finance to 5% (17% currently) will impact NIMs, earnings and RoE for a while; and c) even though asset quality held up , the proportion of project finance and LAP remains high. 

Considering higher assignment income (though core remains modest), the duo at Edelweiss said, “we revise our earnings upwards by >80/35% (albeit on a low base) for FY19/FY20E leading to 5%/7% rise in ABV. However, as core earnings witness a dip and RoEs also remain <13% by FY21E, valuations will be capped at 0.9x P/ABV and hence, we are not revising our target price. Maintain ‘BUY’ with a TP of INR277.”

In Motilal Oswal’s view, “DEWH is a focused play on low-ticket housing. While the company had been gaining traction in core affordable housing loans, it opportunistically diversified into non-retail loans over the past few years. However, this is expected to normalize and DEWH is likely to focus on its core strength of being a low-ticket affordable housing financier. Maintain Buy with a TP of INR300 (0.8x FY20E BVPS).”

Deepak Kumar, research analysts at Narnolia Financial Advisors said, “We expect earnings to remain under pressure for few more quarters due to such transformation in business. Change in assets mix towards retail would help in lowering delinquencies and will reduce credit cost going ahead. Further management is planning to divest its non-core investment. The deal is expected to finalise soon which could boost book value by Rs 2000 Cr.”

Kumar added, “After IL&FS crisis, the stock has corrected significantly and currently trading at 0.5x BVPS FY20e (without factoring non-core assets divestments). We remain BUY with the target price of Rs 302.”

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Now that everything is said and done, to your surprise DHFL is seen as a money making stock in long term and hence buzz over fraud and crises is just an momentary impact. The company is well placed to rise ahead, and considering it is already trading at its lowest level, one should grab this opportunity to make investment. As once the 'Oracle of Omaha' Warren Buffet rightly said, it is rather to invest at fair value in a wonderful company than buy a fair company at wonderful price. Hence, look beyond the short term twist and turns!