DHFL Resolution: Winners & Losers

Disclaimer: I am invested in Piramal Enterprises (even before DHFL came into picture). My views might be biased, though I strive to be not.

After couple of rounds of bidding, finally Piramal Enterprises has emerged as the winner. Let us look into who would gain and at what cost. Also see why it would make sense to creditors and the banking, NBFC and regulatory system in large to conclude this deal. Also let us see who lost everything with this deal.

DHFL's books

First let us take a short look at DHFL's books. Their promoter is in jail for siphoning off of funds. Company's net worth is negative (Liabilities are more than assets). They have not honored the payments to their creditors for more than an year. They have serious asset liability mismatch and if there were no takers for it, this company had to be closed with a serious blow to the entire system.

	Assets	Liabilities
DHFL (Based on their investor presentations)	Loan Book: 87,000 crores	Borrowings: 91,000 crores
	Wholesale Loans: ~50,000 crores Retail Loans: Rest minus investments	~50% of borrowings are form banks (SBI Major lender: ~10,000 cores) ~10% deposits Rest through bonds, ECB, NHB etc.
	Risk: ~20,000 crores loans may not be recovered	Banks have recognized the whole exposure as NPA Depositors & bond holders are not paid interest and not able to liquidate.

What does Piramal offer? 

Let us see what Piramal is offering through their bid.

• 37,250 crores Total
• 12,700 crores of upfront cash and rest will be paid in 10 years

What Piramal would get back is assets (DHFL's loan book) of approx. 60,000 crores. The key risk is, they would get to know the real value of the loan book only after they get to manage it. Some more of bad loans which is not accounted so far may turnout out be additional hole in the balance sheet. The business will need new management and systems, so it will need fresh investments. Also it has to face many legal battles that would surely come in the way. Bigger risks and bigger payoffs are in store for Piramal and investors in his company.

What lenders would get?

Though they have to take significant hair cut, remember they have already written-off their exposure. Any money going back is profit for them now. Upfront cash payments from Piramal and rest amount becoming regular loans improve the situation of banks, so they accepted this deal. It is better to recover whatever is possible than losing the entire amount.

Are regulators happy?

Surely. If you look at IL&FS which went dead few years ago and still the issues not getting resolved, DHFL finding a suitor in less than 2 years is a good move for the whole industry and the system. One reduced headache for RBI, SEBI, NCLT and the insurance regulator IRDA. This improves the confidence in the system in resolving such large scale issues.

Who would lose out entirely?

The shareholders of DHFL. 39% holding by promoters, 55% holding by retail investors and 3.5% holding by LIC will find their investment written off completely. It's recent market capital was around 1,000 crores that would disappear. (Unless Piramal decides to run this company separately which is not their plan either).

What would DHFL's existing customers & employees get?

Piramal said they would not let go any of the existing employees. So it is a relief for them. For customers, this would be a good news as their interest payments would reduce in time as Piramal's credit cost would be lower and they would pass it to existing customers of DHFL benefitting them.

Conclusion: 

Promoters of DHFL have paid a huge price. (Though they are facing charges of siphoning of 30,000 crores). If they had shown integrity and patience, they still would have made good money legally and ethically. But now along with them, equity investors of DHFL are losing their money too. Lenders did lose partially and it is their business to take risk while lending.

Ajay Piramal, an opportunist risk taker, a honed businessman known to acquire and sell companies, is likely to manage this acquisition well, benefiting himself and his shareholders. It may take 2-3 years to integrate it fully into his business and give him the benefits of retail portfolio his company needed. Any risks, I suppose are already priced in and discounted for it. So there would be fewer negative surprises for his company. Positive surprises would not be many either.

Overall, this is a positive step for the financial system of India.