March quarter loss takes away DHFL investors' last string of hope

As tight liquidity squeezed the housing financier's business, FY19 is the first year of loss in its recent history

Once the favourite housing finance company of the Street – Dewan Housing Corporation (DHFL) stock is already faced with nearly 90 per cent price erosion in a year. Its March quarter (Q4) numbers published late Saturday potentially takes away the last string of hope of investors. Q4’s huge loss of Rs 2,223 crore pushed FY19 to end in red. This is first yearly loss faced by DHFL in recent times. 

What’s scarier is the commentary it published over the weekend. DHFL’s loan assets are being scrutinised by several agencies after Cobrapost’s allegations. National Housing Board (NHB) after deliberations has also reduced DHFL’s capital adequacy ratio to 10.24 per cent, which falls below the statutory threshold of 12 per cent. While the company refutes NHB’s charges, the fact that a round of loan book clean up brings the capital adequacy to these levels may be worrisome for investors. 

DHFL’s own admission that the ‘going concern’ assumption could be challenged if they don’t get adequate support from banks and investors (read: private equity (PE) investor), is also a worry. An analyst from a domestic brokerage who has recently stopped covering the stock says this statement is a jolt out of the blue. “There were doubts over asset quality, but to think that it could unsettle the business will be a shock when trade opens on Monday,” he says. 

Going concern assumption (a barometer of financial stability) is one of the three golden rules of accounting principles. If this is challenged, it implies that future operations may come under threat. In other words, if DHFL’s current loans aren’t rolled over, banks don’t approve of adequate fresh credit and PE investors doesn’t come on board, things could go from bad to worse. However, if credit does come by as expected, DHFL believes that it should resume loan disbursements in a month. 

Even then, the quality of Rs 34,818 crore of wholesale loans is a black box. DHFL plans to monetise this portfolio. But that would depend on the outcome of asset quality scrutiny. Another important point is that Q4 numbers are unaudited. Audited numbers expected on July 22 would be based on the new accounting standards – IndAS, which is more exacting on asset quality and provisioning. Analysts say the possibility of Q4’s loss widening basis IndAS appears high and hence the downside risk to DHFL’s stock is also significant. “The bottom of the pit could perhaps be if DHFL resumes operations and banks lend the required amounts,” says a head of research at a domestic brokerage.