Disbursements of DHFL during the December 2018 quarter shrunk to just Rs510 crore, a fall by over 95%. This raises serious questions about how the business will grow. According to analysts, DHFL reported a slow-down in business 'as per expectation' after IL&FS and liquidity crisis. The focus of management has shifted to conserving cash and, hence, the assets under management declined by 3% on sequential basis. It appears that DHFL management repaid loans of around Rs18,000 crore up to December, since the IL&FS crisis.
The management claimed to securitising assets to ensure the liquidity and repayment of liability. In the conference call after the results, the management said it will plan to focus more on retail assets and, hence, developer segment will decline to 5% from current 17% range. The earnings spread is expected to compress significantly due to aggressive sell down approach; however, it would provide much needed liquidity to the company. The earnings will remain under pressure for a few more quarters due to such transformation in business. Change in assets mix towards retail would help in lowering delinquencies and will reduce credit cost going ahead. Further, management is planning to divest its non-core investment. The deal is expected to finalise soon which could boost book value by Rs2,000 crore.
We believe that a dramatic fall in disbursements will have a huge impact on the company. A finance company survives by a continuous process of borrowing and lending. The lack of disbursements will make it difficult for DHFL to generate cash to repay its lenders. If the business shrinks or stagnates, it will be increasingly difficult for DHFL to sustain its existing operations, leading eventually to liquidity crunch.
The business of a non-banking finance companies (NBFCs) like DHFL revolves around the cycle of credit, which involves getting loans at a low cost and disbursing them to the clients at a higher rate of interest. This is what results in a positive net interest margin at its most basic level. This cycle is now broken.
We believe that securitisation will have a limited benefit. DHFL has grown at a breakneck speed all these years and now has borrowings of a stupendous Rs1 lakh crore. A repayment of Rs32,000 crore has to be made over the next one year, of which Rs5,000 crore will be paid in the March quarter of FY18-19. Not a rupee of this borrowing can be wished away. Whether the assets represents this borrowing accurately remains to be seen. The key point about DHFL now is that can it succeed in deleveraging gently or will the sudden braking trigger an acute liquidity crunch.
We have emailed the DHFL management our questions. We will update this article as and when we receive any response from the company.