DHFL deal with pvt equity fund AION Capital faces hurdles over valuation

Promoters of the company, the Wadhawans, are ready to dilute their stake, which is currently at 39.2%, so that strategic investors get joint or majority control

Significant expected non-performing assets (NPAs) in Dewan Housing Finance Corporation’s (DHFL) loan portfolio could turn out to be a roadblock in its ongoing talks with private equity fund AION Capital, a joint venture between ICICI Venture and Apollo Global Management.

According to people in the know, due diligence of DHFL, which is still in its early phase, estimated a significant haircut in the loan portfolio between Rs 20,000 crore and Rs 30,000 crore on an asset under management of over Rs 111,000 crore. This could effectively reduce the valuation of the company much lower than its current market capitalisation of around Rs 1,892 crore. The valuation of the company could be affected further if estimated NPAs are written off by the lenders.  

The company's stock went up by 14.16 per cent on Tuesday following news that AION is going to buy a 51 per cent stake in DHFL for Rs 8,000 crore. 

According to the sources, following the results of the initial due diligence, DHFL's talks with AION may hit a roadblock. In any case, a deal is still far away. When contacted AION spokesperson declined to comment, stating “we don’t react to market speculation”. A DHFL spokesperson also declined to comment. 

AION has been undertaking due diligence on DHFL which is primarily focused on taking over its healthy retail loan portfolio which stands at Rs 37,000 crore after the housing company sold loans about Rs 41,000 crore to banks to meet its debt obligations. 

However, according to the sources, the structuring of the deal could take various routes — DHFL could demerge its retail loan portfolio and sell it to a strategic investor like AION. If that is not possible, a strategic investor could pick up equity in DHFL, which would dilute the promoters' stake, and then sell other parts of the business, keeping the retail loan portfolio. 

The firm has a wholesale loan portfolio, valued at Rs 30,000 crore; it has been in talks with Oaktree Capital to sell the portfolio. Apart from AION, Cerberus Capital — also a distressed asset private equity fund — has shown interest in DHFL.  The promoters of the company, the Wadhawans, are ready to dilute their stake, which is currently at 39.2 per cent, so that strategic investors get joint or majority control.

However, the company is looking at rustling up Rs 7,000 crore-Rs 8,000 crore from the deal, which assumes a huge premium on the traded price of the shares.  The lenders of DHFL recently signed an inter-creditor agreement and have given DHFL seven days to prepare a resolution plan, which was discussed on Monday. 

Under the resolution plan, DHFL will ask for a fresh line of credit of Rs 1,300 crore-Rs 1,500 crore every month to start fresh loans.  It will seek extension in its loan book between eight months and three years. The  firm reported a standalone net loss of Rs 2,233 crore in Q1FY19.