THE FALL OF NBFCs – FEAR FACTOR AT PLAY

The intraday 1000-points flash crash on Friday was scary to say the least. The culprit was Dewan Housing and the over-reaction was triggered by IL&FS. Ironically, right now, IL&FS Transport and Dewan Housing, both are among the top five gainers on the BSE while the NBFCs which underwent a carnage on Friday, continue to bleed even today. So if Dewan Housing and IL&FS were responsible for precipitating a sense of panic in the NBFC and housing finance company (HFC) counters, how come despite these two gaining, the NBFCs and HFCs remain in the deep red? 

Muthoot Finance slipped almost 7% to Rs.428; LIC Housing Finance is down 3.5% at Rs.422.30; Repco Home hit a new low at Rs.429; Indiabulls Housing slipped over 7.5% to Rs.981.15; Ujjivan Financial Services hit a new low at Rs.277.05; Cholamandalam Invst Fin is down over 6% at Rs.1190. The list goes on…

Obviously the words of Arun Jaitley, saying that said the government will take measures to maintain liquidity in NBFCs have provided no succor. The fall in NBFC stock prices is steep on growing fears of liquidity crisis. SBI too has denied presence of any cash crunch but the defaulting of IL&FS has created a sense of panic. Add to that, the fears unleashed on Friday by Dewan Housing Finance. This is what led to the crash on Friday, with fears growing that liquidity and demand conditions have weakened in the market.

Dewan Housing released a statement today stating that that the company has neither defaulted on any bonds or repayment of its financial obligations, nor has there been any instance of delay on any repayment of any liability. On September 21, 2018, DHFL fulfilled its commitment of repaying commercial papers worth Rs.575 crore and as per schedule and terms, is repaying Rs.400 crore on September 24,2018. Following this, the stock price today bounced back, going up 25% to Rs.438.75.

RBI and SEBI also issued simultaneous statement saying, “The Reserve Bank of India and the Securities and Exchange Board of India are closely monitoring recent developments in financial markets and are ready to take appropriate actions, if necessary,” yet, the market remains nervous and unconvinced.

What this probably means is that there is surely a bigger force at play. We might neither be able to unearth it nor prove it but the underlying truth is that there is most certainly a fear factor at play. Marketmen say that there is a seed of doubt because why did DSP Mutual Fund sell debentures of DHFL at a yield of 11% when the trading price was much lower? The panic of IL&FS defaults has already spooked the market and on top of that, this selling caused panic. But it’s the habit of the market – never trust what the companies clarify as they feel the faith on most management has come down. The perception is that there is something amiss, irrespective of what the company says. Yet, the stock price of DHFL bounced back sharply.

Clearly, something is amiss and maybe the market knows more than what we all know. In all likelihood, it is just some forces at play. The point to be noted here is that despite the carnage, stocks which had a very strong balance sheet, in NBFCs and HFCs, the fall was not as sharp.

The verdict for now – panic is the current underlying emotion on Dalal Street. NBFCs and HFCs could see further correction, even from the current levels. Mr.SP Tulsian says that the correction could be around 10% more and feels that this panic is irrational. Best to wait till Thursday for making any buy calls.