DHFL Stock Swing: Should You Buy Or Sell?
Friday, 21st September 2018, was dramatic in the Indian stock market. The BSE Sensex, which opened on a strong footing, suddenly tanked 1,127.58 points, or 3.03 per cent, to hit a low of 35,993.64 in afternoon trade, before staging an equally sharp recovery within minutes. It finally closed at 36,841.60, down 279.62 points. Shares of housing finance firms slumped, with Dewan Housing Finance tumbling up to 42 per cent on fears of a liquidity crisis. Reports of debt defaults by IL&FS also sparked concerns, which spilled over into other NBFC counters. Our Analysis.
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“In the short run, markets are a voting machine. In the long run, they are a weighing machine” – rarely have these sagely words from none other than investing great Benjamin Graham rung true as much they did yesterday! On 21st September ’18, markets collectively voted that DHFL (Dewan Housing Finance Limited), which is a AAA rated borrower, deserves to have it’s stock pummelled by 42.58%. Not just that, a handful of other housing finance companies took a collateral drubbing as well. Staring at your TV screen in shock and awe? Here are some of your questions, simplified and answered.
What happened to DHFL on Friday?
Although the exact reasons are unclear, it would appear that Hemendra Kothari-led DSP Mutual Fund sold a portion of its holdings in DHFL bonds, at a higher “yield” (of 11%) than the prevailing market yield for AAA bonds. In simple terms, this is equivalent to a mini-distress sale of sorts. Still iffy from the recent IL&FS default, markets panicked and assumed that DHFL is poised from some kind of default.
DSP was quick to clarify that their decision to sell DHFL bonds had nothing to do with its purported creditworthiness. “We have been operating at the lower end of the duration risk spectrum across our debt funds with a view to cushion the impact of rising interest rates. To execute this view, the AMC has sold a range of securities across the rating spectrum & multiple issuers over the last several months. Recent sales reflect our interest rate view and not a credit view on any specific issuer”, their management clarified in a press note.
Why did the stock crash?
Simply put – the stock crashed on panic and rumours. Rumblings of an upcoming default spread through Chinese whispers, resulting in a crescendo of panic that culminated in the stock being dumped en-masse. In the end – the stock fell because the stock fell because the stock fell!
Are the rumours true?
Anything’s possible – but it’s extremely unlikely, to put it mildly. DHFL is a muscular company. Their fundamentals are strong and they have strong liquidity of Rs.10,000 crores in their system - which equates to 6 months of cash. Their CP book shall be about 6% of their total borrowings and their total assets and liability book is over INR 1 Lakh crore. They’ll remain cash surplus even after considering repayment till March 2019 of all their liabilities on account of CP, NCD, interest payment, bank dues. And as you already know, they are a AAA rated issuer.
What can be the repercussions if the rumours are true?
Even if the rumours are true (which, as mentioned before, is extremely unlikely), the worst (and more) has already been priced into the 42.58% fall. If the rumours turn out to be true, the stock may fall marginally from its CMP of Rs. 350.
What is the management saying?
The management is surprised, to say the least! They have gone on record stating that they are in a very strong position, business-wise. Their focus on affordable housing augurs well for their future, too.
Says Kapil Wadhawan, CMD – “This market movement has come as a big surprise to not only DHFL as an organization it is also for the industry at large. We wish to categorically state that DHFL has not defaulted on any bonds or repayment nor has there been any single instance of delay on any of its repayment of any liability. We do not have any exposure with IL&FS. DHFL continues its loan growth disbursements in the affordable housing segment going forward”
Should you panic if you are invested in DHFL?
Well, that’s easier said than done. Of course, you’ll be panicking. You may even have had a sleepless night! But try to stay calm and not take fear-driven decisions. Close your eyes and wait for the stock to recover.
Should you buy DHFL at this price?
If you’ve got nerves of steel and a long-term horizon, absolutely. The stock has been in a strong uptrend since March this year, on the back of robust growth. The stock is down to an 8.19X P/E ratio now, making it a great value bet. Affordable housing is going to keep growing, and so is credit offtake in the segment. But hey – if you’re a panicky person and looking to make short term, speculative returns, stay away. The stock is likely to yo-yo about before it settles into a nice rhythm again.
What can happen on Monday or next week?
With the weekend at hand to cool things off, Monday will likely see a gradual or immediate return of ‘rationality’ to the market’s votes about DHFL. We’re quite likely to see a fairly strong rebound in the stock.
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