HDFC Sec gives excel download of all bonds data. Going by the YTM it is clear that there is dislocation in bonds having shorter residual maturity. Obviously some have been punished in the longer maturity bonds as well mostly due to perception issues. The key question is should we lock into shorter duration bonds and suffer reinvestment risk or go for good YTM for slightly longer residual maturity. One eye popping return is
920DHFL19B - DHFL - AAA- 9 months having YTM of ~20%!!
This is what happens when you have liquidity and perception issues. I still think it is not as attractive as it made out to be. One has to pay ST tax and bear reinvestment risk. Not to forget opportunity costs â What if equity itself give 15-17% return by then. This is great for bond investors though.
Bajaj Finance came out with good numbers yesterday. In todayâs ET an interview of Rajeev Jain is published. In the interview besides other things he has given his views on the current NBFC crisis and I think his comments are relevant to even DHFL (which is a NBFC). Here is the extract
Q: How do you see the demand in terms of consumer finance business shaping up? Can you sustain AUM growth at over 35 odd per cent?
The demand outlook remains reasonably strong. We are in the middle of a festive season. We are seeing reasonably strong discretionary consumption demand at this point in time. From a medium to long-term outlook standpoint, can we continue to grow upwards of 25% which is our guidance for many years? The answer is yes.
So I do not see that having changed in any given manner. Liquidity squeezes and liquidity crunch is part of bond markets anywhere in the world. We have experience as a company a liquidity squeeze I would say in 2013 the sector saw it, the industry saw it.
There was a freeze for a period of 50-55 days and things got back to normalâŚ.
Q:Should RBI be taking further steps to aid liquidity? Are you expecting tighter ALM norms for the NBFC industry?
As I just mentioned, the 2013 taper tantrum which caused the liquidity squeeze was actually much worse than what we have seen so far. We are 30 days into this so-called liquidity squeeze/crunch/freeze, but we have not felt a freeze or a squeeze.
Commercial paper markets have been liquid. Long-term bond markets have been liquid. We remain open for business across all our lines of businesses. You will have to take a company by company view rather than a sectoral view at this point of time.
Dinesh, assuming a worst case scenario, if banks refuse to lend further to DHFL, can they sell down most of their portfolio, repay banks with that money and then left with cash on their books (book value)? Also close their other borrowings as and when they mature using their assets. Bascially shut business and be left with book value? Since stock is almost 0.5 of book value now.
Also did you get a chance to study what DHFL did during the taper tantrum. How did it raise funds and grow the business?
They have annual exployee expenses of 350cr and 750cr of other expenses. An operation cannot be wound down in a day - until that happens fixed costs remain what they are - fixed! Albeit at a lower level as they wind down
I would imagine Securitization of loans will definitely come at a cost - perhaps someone more informed that me can talk about modalities of this - so for example if they sell 1000 cr of loans - do they just eliminate assets or liabilities in equal ratio of do they have to for example some fee
Longer term Contracts such as rents
Im guessing employees in the collection department cannot be eliminated even if disbursement is 0!
Will they realise 100 cents on the dollar when they try to sell their fixed assets and long term investments? On the other hand One would have to analyse if there are fixed assets which are worth much more than their book value for example DHFL Pramerica?
Probably difficult to realise book value but probably not hard to realise 0.5 book?
Abhishek,
Good points. Assuming in the hypothetical situation of closing business:
They will be winding operations slowly since the longer term home loans have NCDs which they do not need to pay till the expiry date at which point they will also recover the entire home loan amount. Hence letâs say the wind down happens gradually over 3-5 years or longer they can continue to run their operations while paying costs and reduce expenses like staff, rent etc. Most likely they will not make major losses on net profit level
Assuming they are able to close in 3 years without losses value should converge close to book value
Management so far is managing pretty well. Iâm sure in their 30+ years of operating history, they must have seen much worse and have seemed to come out ok. Letâs hope that this discussion remains exactly what it is - hypothetical!.
Yes, if cost of capital remains high, margins could be hurt (to the extent the costs cannot be passed on) or, growth will be hit. However, letâs not forget the vagaries of the credit market (someone already pointed this out in an earlier comment with examples). Itâs finicky, to say the least. You never know where the yield will be a few months from now.
Along simlar lines, the Piramal concall offered some hints (posting here incase any of you missed it):
Piramal was able to raise money in Oct at 20bps higher than in September. Not as bad a situation as the stock prices have been indicating.
With a few NBFCs pausing their lending, well capitalised ones are using the opportunity to step in and fulfill demand.
Point 2 is of specific importance/concern, if DHFL has paused lending (as i hear from industry sources), be ready to bear some short term pain. Do correct if i interpreted that wrong.
Given the weak volumes, not too much to read into. Itâs more indicative of retail fear. If volumes pick up (indicating institutional guys rushing for the door), that would be a real worry, and more indicative of potential CoC.
Annualise your calculation. The yield will be realised over next 4 months. Adjust for that. Check Zombyâs earlier comment: Dewan Housing Finance Limited
No Board Meeting notice up untill now. BM Notice i think is given atleast 7 days prior and deadline is 45 days from end of quarter. An area of concern ?
Regarding home loan disbursement,they are still way behind as per Kolkata branch.For last forty days sales mgr.is toying with my approved loan though two emis taken already!!!And no assurance of disbursement sooner!
So it must be facing cash crunch very hard.I am thinking to go for legal action and told them so but still not budging.Lets see how it pans out nowâŚ
The % of fall coupled with NBFC crisis will make sure that the industry doesnât regain lost ground quickly. Additionally, DHFL being at the centerstage by chance will find the rise tougher. Stopping loan disbursement will just make things worse. Itâs like a downward spiral.
I find it quite amusing that the market priced the stock as if DHFL will default this quarter. It didnât and indeed posted very good results. But in the process of doing so, the rumor spread a panic, which tightened credit market yields. Now this will probably adversely affect DHFLâs results for the next quarter. They have been actively redeeming high-cost debt, which is good. But they have also stopped new disbursements, which is bad. Iâm guessing we might see a drop in sales, but an increase in margins.
In any case, the lessons learnt are the power of feedback loops and how mere perception can make or break companies in the BFSI space.
Thanks for your observations,dhfl curtailed disbursement significantly.First they delayed my sanctioned loan for two months and I cautioned legal action n then they want to cancel now with 3 EMIs refund etc.Their insurance business will affect also as they bundle the loan applications n big booster for cash I guess!If business is run this way reputation will be hurt. So next quarter will reflect more clarity in all fronts,they are now trying to focus on repayment n avoid defaultâŚ
