Ever since the sale process of beleaguered Dewan Housing Finance Corporation Ltd (DHFL) commenced with high profile bidders like Piramal, Adani and Oaktree, investors in the stock market are making a beeline for a near junk stock. The stock that crashed to a low of Rs 8.40 in April this year has now gained a whopping 285 per cent in just nine months to touch Rs 32 per share.
But why are investors playing with fire by acquiring shares of a company whose net worth has largely eroded? The reason could be lack of understanding. The company, which is making losses, has a negative net worth of Rs 7,612 crore as on September 30, 2020. The company also has a huge non-performing assets with cases of frauds filed by the RBI appointed administrator.
In such a M&A, the existing capital of the company would be completely written off or cancelled when a new buyer with fresh equity takes charge. A recent example is Lakshmi Vilas Bank, whose equity capital was completely written off after acquisition by the DBS Bank. Under the Insolvency and Bankruptcy Code (IBC) too, there have been many cases where equity capital have been completely written off.
But market experts believe, in the case of DHFL, investors are hoping for an equity dilution and not a complete write off, which could give them a good window to make money in the long term if a stronger player buys the company. They cite the example of Yes Bank where existing equity capital was diluted and not completely written off .
But such a possibility of equity dilution for existing investors looks highly unlikely as secured debt holders are taking a hair cut in the present deal. They are purely valuing the company based on assets quality or good quality loan book. Clearly, the culmination of bidding would bring bad news for existing investors. The new bidder is also likely to delist the company. Currently, there are 3.25 lakh equity investors in DHFL as on September 30, 2020.
The share is actively traded with two weeks average quantity of over 10 lakh shares. Big institutional investors have also left the company. There was a time when the company's stock rose to Rs 670 during September 2018. Back then, there were big investors like BNP Paribas, Vanguard and Rakesh Jhunjhunwala present in the company.