Event Tracker . Better days ahead for DHFL investors?

DHFL was back in the limelight last week. Auditors had raised several concerns and put forth qualifications that could have a material impact on the company’s financial statements for the year ended March 2019. Given that the fortunes of the housing finance company depend on its ability to monetise assets, secure funding from bankers and roping in a strategic partner, the auditors’ report casting doubts on the quality of the assets is a big concern. Of the ₹89,387-crore loan book, about ₹34,800 crore pertains to project loans, Slum Rehabilitation Authority (SRA) loans and wholesale mortgage loan portfolio. Banks and other buyers may not be too keen to buy these loans, given the underlying risk. On the retail front, given that the company has sold over ₹30,000 crore so far to meet its debt obligations, how much of the remaining ₹50,000-odd crore of retail loans they will be able to sell needs to be seen.

There were several disclaimers and qualifications put out by the auditors — Chaturvedi & Shah LLP and Deloitte Haskins & Sells LLP. Few are mentioned here.

Auditors’ observations

DHFL, in its notes to the March quarter results, had stated that in respect of loans of about a) ₹16,487 crore, cheques received from borrowers were initially recorded as receipts, despite the cheques not been deposited in the banks, but were later reversed; b) It had also flagged some lacunae in the documentation of project/mortgage loans of ₹20,750 crore; c) And marked down value of loans (wholesale) aggregating ₹34,818 crore.

Pertaining to all these (a,b and c), the auditors stated that they were unable to obtain sufficient evidence to support the values of the loans. Post the Cobrapost allegations, the report by independent chartered accountants looking into the allegations, had highlighted certain procedural and documentation lapses. The auditors stated that they were unable to determine if these allegations would have an impact.

Resolution underway

The company’s fortunes now ride on its ability to secure funding from bankers and restructure its borrowings/liabilities. Lenders to DHFL have already entered into an inter-creditor agreement (ICA) for a potential restructuring of the company's liabilities. DHFL has reportedly submitted a resolution plan, seeking a moratorium on payments and additional credit line to restart operations.

The company is also looking for a strategic investor. In the past week, there were reports about AION Capital’s infusion of around ₹8,000 crore in DHFL for a majority stake.

What for investors

The wealth of DHFL shareholders has been decimated over the past year, with the stock losing over 90 per cent. In the past week, despite the auditors’ report, the stock had rallied 14 per cent on Tuesday on the back of the AION Capital news. Since then, the stock has fallen 8 per cent, owing to the company defaulting on some of its bond repayments.

What next?

True, a lot depends on the outcome of the resolution and the ability to rope in a strategic investor. But a deal could leave shareholders in the lurch. Fresh infusion of capital by the new investor or a steep reduction in capital as part of the resolution plan could hurt minority shareholders.

Promoters now hold 39 per cent and the public 60.7 per cent in DHFL. If a strategic investor comes in, say, infusing ₹8,000 crore (according to reports), there could be a massive dilution for existing investors, given that DHFL’s current market capitalisation is around ₹1,700 crore.

Hence, investors should not get swayed by reports and steer clear of taking any fresh exposure in the stock.