I meant 500cr CP’s raised and not 5 cr
Of course, it’s too early to tell. They have withdrawn debt issued at ~9% at around 11-12%, which is a very smart move. Their new issues have indeed a higher cost, but not by much. Their latest 10-year NCD was placed at 9.9%, which is 0.8% higher than their original rate of 9.1% (However, the RBI has increased rates by 25 Bps in between, so it’s actually more of a 0.55% premium). The rise in NPAs this quarter might very well be due to disposal of slightly higher quality loans.
All I’m saying is, the market actually created a panic situation by just guessing that there was a panic situation (When there wasn’t one). The power of feedback loops is amazing.
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As per today’s Cnbc television interview of Mr Wadhawan, he mentioned
- Business model of Dhfl needs to change. This is a drastic statement in my opinion after running business successfully for 25+ years. I am guessing he said this because their cost of borrowings are substantially higher than other HFCs and given this whether they can generate a reasonable ROE going forward in their core segment. He mentioned they will focus on securitiazation going forward
- He focused a lot on improving ROE going forward instead of Aum growth which is great.
- He mentioned forming long term alliances with other financial institutions (probably liabilities rich and assets poor)
Disclosure: invested
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My personal view is, we need to read between the lines on what the CMD said in his interview.
Management highlighted 3 strategic decisions in the earnings conference call, which are as follows:
- Strategic decision to convert DHFL to a completely retail focussed entity. This means - developer loans - which constitute 17% of the lending portfolio (amounting to around 22K) as of Sep. 2018, is to be brought down to below 10K (lowered by more than 50%) by March 2019 and subsequently bring down to 5% or so by Q1, Q2 FY20. Different strategies are being considered to sell down the portfolio. This includes finding portfolio investors, particularly for projects that are 60% or more complete. Alternatively, DHFL is also considering joint development route or an AIF structure. DHFL has 2 types of projects - SRA and non-SRA in portfolio. From management commentary it appears there is interest in these assets, particularly the SRA projects, and management appeared confident of achieving the targets, although some hair-cuts are possible.
- The second strategy is to make growth more profitable RoE accretive and less capital intensive. This essentially means greater securitisation of retail loan pools, both home loans & LAPs to banks. This will reduce capital requirement and improve RoE
- The third strategy is divestment of non-core assets. This process has already been initiated and an investment banker has been identified for the purpose.
Needless to say, ALL the strategies mentioned above are directed at raising liquidity. You can call it a new business model or something else, but the objective is this. The next few quarters are expected to tough for the industry, DHFL included, till normalcy returns to the debt market. In the near term, fresh disbursements are expected to be negligible (as pointed out by other VP members), spreads are expected to compress and hair-cuts are likely on the monetisation of developer portfolios. However, company has 34 years of experience in going through multiple stress cycles. Management has experience and strategies in place to handle the near term liquidity crunch.
Disc. invested & views are personal (& not an expert on BFSI)
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Hi,
I am just looking at the investor presentation. Some observations and some questions
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A total of 139.27b was paid. How is it paid? Next slide has the answer. 74.1b was direct assignment, which is selling the loans to banks. Going forward I guess this 74.1b, will not generate interest for DHFL, but to the bank which acquired it. I don’t know if they get any commission for collecting interest and principal on behalf of the bank . How much is the 74.1b out of total loan book? My guesstimate is 7% and hence the Interest income will drop by 7%. Assuming no new fresh disbursements, will the de-growth be limited to 7%?
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Pdf page no 35 / slide no 34. Retail loans as a % dropped from 72% to 57%. Isn’t that a reason to worry? High quality retail loans are going down over a period and not just because of the recent issue. Project loans went from 9% to 17%. How to find who these clients are?
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Pdf page 36 How to understand provisioning? why did it drop below 100% compared to other time frames. My understanding of provisioning is if 100 Rs is identified as an NPA, how much is set aside to cover that loss of 100.
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Pdf page 37 The bigger issue. Do the banks lend for longer term at slightly higher rates than CP and that is the reason why all these guys go for CP? Why are they increasingly taking more from DCM route than banks? Is it even a prudent strategy to have 50% of funds whose interest is varying and the company doesn’t have any control over the interest rates? negotiating with banks are easier than money markets I guess
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Page 37, Though 5 years is a long time where ALM will start hurting pinching them, I am not sure how much they can keep getting cheaper and cheaper loans, since the other side which is passing on interest costs without losing customers is not easy
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Page 37 again, My understanding is AUM= On B/S loan + Off B/s loan. Loans are moved Off B/s by selling (securitization or Direct Assignment). They say 1HFY19, gross securitized amount is 46.2, but what we saw after ALM issue 79.1b was securitized. Are they misleading here? Also GNPAs for on B/S is higher than overall AUM (page 33/ page 47), which essentially means only high quality loans are getting sold off.
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Goals set in page 43 look lofty and a joke at the best from the recent history.
To me it looks tasks are uphill on many fronts unless they sell a lot of assets.
Disc: Invested. Bought on Sep 21
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Moneylife post on DHFL having similar arrangement like Yes Bank promoter. Seems negative news for the stock. Mutual Funds Have Also Lent to DHFL Promoters’ Holding Company Just Like Yes Bank’s Rana Kapoor
Article includes the following para-
While rating them AAA, CARE has argued that rating assigned to the Non-Convertible Debentures (NCDs) of WGCL are due to the credit enhancement in the form of a pledge of Optionally Convertible Debentures (OCDs) and Compulsorily Convertible Debentures (CCD) issued by DAIPL and DIL respectively (both being 100% subsidiary of DHFL). Also, an unconditional and irrevocable revolving DSRA (Debt Service Reserve Account) guarantee and an unconditional put option has been issued by DHFL in favor of the debentures.
Not sure what Optionally Convertible Debentures (OCDs) and Compulsorily Convertible Debentures (CCD) issued by DAIPL and DIL means. This sounds like pledging to me.
An earlier para saya-
Wadhawan Global Capital (WGCL), the holding company of DHFL (Dewan Housing Finance Limited) has also raised Rs2,125 crore through zero-coupon non-convertible debentures (ZCNCD) maturing in 2019, 2020 and 2021.
Disclosure: Not invested but tracking.
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If the fixed instuments used are the ones that are subscribed to by WGCL, as it seems logical to assume, then I think Moneylife going over the top. The owner of the pledged instruments has not been mentioned in the CARE report but it is natural to assume that they are owned by WGCL.
In effect the promoter entity is pledging the fixed instruments (for now) it has subscribed to in DHFL subsidiaries. Why should that even form of share pledges?
In case of Yes Bank,the promoter shares were indirectly on the hook.
Disc: Not invested
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@diffsoft
OK. Do you think the mutual funds have adequate safety net should DHFL default? How will the Optionally Convertible Debentures (OCDs) and Compulsorily Convertible Debentures (CCD) issued by DAIPL and DIL come into play then?
I understand that this isn’t share pledging technically but a guarantee as long as DHFL doesnt default. If it does default, my reading is that OCD, CCD will get triggered and then DAIPL and DIL being subsidiaries of DHFL will have to make good the guarantee in which case the underlying guarantee which could be shares could get triggered.
Assuming this is right then the deal seems to be structured fairly between DHFL and the MF’s and CARE also seems to have rated the instrument.
If WGCL defaults then it appears that the pledged instruments (OCD and CCD) will be invoked in favor of the lenders (i.e MFs)
But what should be worrying is a certain circularity in fund raise by DHFL. For instance DHFL has reduced its debt by selling its stake in Primerica to a another firm, that is funded by WGCL, which in turn has raised money by pledging its O/C CDs issued indirectly by DHFL. So the improvement in gearing could be a mild form of chimera.
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Thanks for this @diffsoft. As a novice investor I’m quickly learning that stock market investing shouldn’t even be attempted if one doesn’t have the time and patience to understand the intricacies of the business.
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DHFL holdings has infused 2k cr into housing finance company after selling Pramerica to DHFL investments Ltd (DIL).
DHFL holding company raised bonds guaranteed by DIL(Moneylife article) to pay for Pramerica sale to DIL.
To buy Pramerica ,DIL issues bonds to DHFL holding company and also pays interest on the bonds for 100 months.When these bonds mature, DHFL holding which currently holds 50% in Pramerica will get controlling stake in Pramerica
In simpler terms the holding company paid 2k cr to DHFL Housing finance company to buy the Insurance company
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Dear Vijay,
Thanks for the article link but seems only accessible to subscribers. Would you be so kind to post the gist / key points here?
Really great digging up to establish the circularity in fund raising while avoiding disclosures. Here’s what it looks like (I am a subscriber so could read the analysis):
DHFL would sell part of a firm X it owns, to a subsidiary (that it will not consolidate) and raise equity capital.
The subsidiary in turn borrows from the promoter to raise capital to buy that X from DHFL. The promoter in turn borrows from various mutual funds by promising them that DHFL has guaranteed that value of X, and thus the subsidiary value is protected and thus promoter’s lending is protected and thus promoter borrowings from mutual funds are protected by DHFL for the MFs.
In effect promoters are providing equity capital to DHFL which is in turn guaranteed by DHFL!
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May I know why is that?
As per your post probably carried forward from moneylife, this scam began in 2013.
- Why has SEBI not taken any action till date?
- Credit rating agencies are mostly junk companies and should be put out of business as has been seen before when Listed company’s promoters ran away with fixed deposit owners money. But why did they reaffirm AAA ratings to DHFL after its stock fell 60pct?
- Why are FII’s and DII’s so confident on DHFL if such is the case? Even Jhunjhunwala just increased his stake when the stock price fell.
- Why are Lenders not pulling out their money lent to DHFL and why did they even lend it in the first place after due diligence every year since 2013?
- This article has been out since more 2 weeks now. Why are investors still buying into this share and nobody crying foul?
- The voting results clearly show that institutional investors supported the management while Stakeholder Empowerment services didn’t. Why? why did SES not take followup action with SEBI? IF SES did followup, what was SEBI’s finding?
DISC: invested in DHFL but would want to know what is cooking. At present, DHFL share looks extremely cheap for the long term and I usually am wary of such a situation. Rarely do we see a stock that falls so much rise again. Also, DHFL’s compliance has always been a grey area as has been seen at other companies run by their family members (DHFL has always been available at cheaper valuations to peers).
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If it actually generated only 7cr of net profit for the joint venture, good riddance.Personally, I never saw any of their funds amongst the best performing ones in the already competitive mf industry.
On the positive note, this means they are putting honest efforts in keeping the business afloat by making sure that the liquidity is there.
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