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A Dire Warning To DHFL Shareholders In The Resolution Process

DHFL-scaled.jpg

If you own DHFL shares, which have run up recently*, and have hopes that the “Resolution plan” for the company will result in massive gains, we have some really bad news for you.

* (So what, every stock has been moving up.)

The DHFL shares are likely to be worth ZERO.

What are you saying, Deepak? It’s a bull market!

Yeah, yeah, I know.

But “bull” is sometimes the first four letters of an eight letter word which is a more appropriate form of addressing stocks like DHFL.

What you want to know:

  • DHFL has defaulted
  • There’s some 87,000 cr. of debt they can’t pay back
  • They have given out home loans, some of which are fraudulently made, apparently. Read our post on this.
  • RBI has taken over the “resolution” of this company now.

There are now four applicants for the resolution. The idea of resolution is simple: I’ll pay you some money, and then you have to forgive the rest of the debt. Then I take over the company and run it.

(This is different from “liquidation”. Where, you simply sell everything the company has, even at a discount. And then shut it down. )

DHFL has four resolution applicants. We’ll discuss three.

  • Oaktree.
  • Piramal
  • Adani
  • SC Lowy (we’ll ignore this one, as they haven’t really proposed a resolution – mostly a take over of some of the assets only)

What Happens To Equity Shareholders?

The resolutions plans submitted this far were apparently for the “assets” of DHFL, not for the company itself. In December, apparently, resolution plans involve the entire company. But our analysis of all the events so far give us a clear indication of the following:

They are quite likely to write off all the equity capital (shares) to zero.

Basically, if any of these plans are approved, the DHFL shares are likely to be worth nothing. In this case, those shares will be cancelled, for zero payment. Such things has happened in the recent past.

The current situation in the resolution process indicates that bids have never been to buy the company so far (only the assets), and given that the debt holders are taking a haircut, there will be nothing on offer to equity holders.

Equity shareholders are likely to get nothing, like it has been in the case with Lakshmi Vilas Bank.

If you own these shares, you must thank the bull market that someone is actually buying these shares.

Think about it. Debt holders have to take a haircut. This is retail investors in NCDs also. Why would they agree to take a haircut while shareholders are okay? They will also demand that their haircut gives them shares instead. If you give them all shares in lieu of the haircut, then they will own nearly all of the company. And then the buyer will want to own most of the company, so even more shares to him. This is usually sorted by just writing off equity – which was earlier not easy, but the IBC process and SEBI rules are now modified to allow quick and easy delisting.

More importantly, in the meeting today, they discuss a “Liquidation value”. This will apply only if debt holders are getting some money as if the company is being liquidated. And if that’s the case, equity goes to zero (in any liquidation where debt is much higher than a bid, equity is valued at zero).

(See link of latest discussion)

Is This Even Legal?

Oh of course it is, and it should be.

If a company cannot pay back it’s debt, why should equity holders have any value at all? This is how resolutions should be.

How much will debt holders get? The best estimate right now is around 36,000 cr. Even that, looking at the different bidders revelations, is structured as around 13,000 cr. in upfront cash with the rest in long term debentures over years. That part makes me believe that the recovery will be between 20% of 40% of the face value of the debentures. Fixed deposit holders will also get something, but again, it is likely to see a haircut.

So What’s The Takeaway?

We’ve said this in the Lakshmi Vilas Bank case. Earlier, in Monnet Ispat. And Electrosteel Steels.

We even mentioned DHFL in our post on “Zombie stocks”.

We strongly believe that this share is going to zero. Consider this a warning for DHFL shareholders.

Note: An earlier version of this article mentioned the resolution plans, but on due consideration we see that there could be room for renegotiation. Still, our analysis says any value to equity is unlikely. Thus our warning remains the same. 

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