Investor’s Diary | Lessons Learned From DHFL Fallout
All is not well with DHFL. Worse affected are its shareholders, fixed deposit holders and those invested in the company’s non-convertible debentures.
Even as Diwali celebrations continued over the last weekend, it was a cloud of gloom for some investors of DHFL with more skeletons tumbling out of the closet.
A forensic audit of DHFL by consulting major KPMG, has revealed diversion of funds into promoter-led entities ranging to the tune of Rs. 20,000 crores. Industry experts believe this latest disclosure could put the proposed debt restructuring of DHFL at risk.
So how did this all start?
DHFL is a non-banking housing finance company, which is also referred to as a shadow bank. The company offers housing loans, NRI Home Loans, Mortgage loans, and SME loans.
After the collapse of IL&FS last year, banks turned cautious about lending money to NBFCs which in-turn resulted in liquidity crunch across the market. The IL&FS crisis in September 2018, created a panic and triggered a massive sell-off in NBFC stocks. It was feared that an ‘IL&FS-like’ situation was emerging across NBFCs especially in case of DHFL. As a result in the month of September 2018 itself, the stock of DHFL got hammered by around 60%.
In January 2019, an expose by undercover investigative journalism website, Cobrapost claimed that the company’s promoters were involved in a Rs. 31,000 crore scam to drain off company’s money. DHFL however strongly denied these claims and came out with an independent chartered accountant’s inquiry which found the allegations levied by Cobrapost to be untrue.
Earlier this year, to cut down on some of its debt, the company resorted to selling off some of its businesses. However despite all those efforts, in the month of June DHFL failed to pay around Rs. 900 crore worth of interest, resulting in a downgrading of its ratings for all of its commercial paper by credit ratings agencies.
One after the other a series of negative events put DHFL in a tight spot, and now even the viability of the company remains in question.
But why I am telling you all this? The entire episode offers some valuable lessons to investors.
Lesson # 1: Don’t catch falling knives
From the above chart, we can see that in September 2018, the stock of DHFL was trading at around 650 levels. Currently it is trading around Rs. 20, eroding investor wealth by a huge margin.
Legendry investor Warren Buffett has always stressed the importance of buying ‘quality’ merchandise at beaten down prices irrespective of whether it is socks or stocks. However, not all stocks hitting new lows can be considered as quality stocks. Many retail investors often end up in the trap of buying stocks which foreign investors and large institutional investors are dumping simply because it is available at an unbelievably low price.
While fundamentally sound businesses trading at new lows always have a chance of bouncing back to their original levels, the same is not applicable in the case of businesses with weak fundamentals. Remember the classic case of Yes Bank which kept falling and falling because of corporate mismanagement, even as retail investors kept buying in the hope of reversal of fortunes.
Lesson # 2: Copycat investing does not work
Last year a celebrity investor increased his stake in DHFL by purchasing 13.34 lakh shares. And when celebrity investors enter a stock, many retail investors who believe in copycat investing follow. After all, how can a big investor go wrong? Isn’t it? That too if the celebrity investor is one who ranks among the most successful investors in India.
Many retail investors blindly copy large investors with the hope of mimicking their returns without understanding the logic behind it. Due to huge buying interest, the stock price does move up in the short run. However such a rally is not justified.
In case of DHFL, the celebrity investor we talked about earlier is himself sitting on a loss of over Rs. 178 crore.
Herd mentality is a human tendency. Many small investors tend to subconsciously imitate certain individuals who have a history of success stories behind them. However, such imitation can prove costly because of the time gap between the passage of information. The stock price could move up by the time one hears about it or actually buys it.
The right time to exit a stock is also very important. To avoid media attention or gradual profit booking, celebrity investors often sell in small quantities. Unaware of this, small investors continue holding the stock. That’s why such investments by retail investors often end up in losses.
It is said that life’s best lessons are learned during the worst times. Only time will say whether DHFL will emerge unscathed from the current situation or perish. Irrespective of the outcome, investors should not miss these valuable lessons we discussed above. Sometimes even the most seasoned investors miss out on crucial indicators that reveal all is not well with a company. Because apart from the quantitative factors, there are a few intangible attributes about the company that is not too perceptible.
That’s why professional research matters. A good stock advisory service will not only undertake thorough due diligence but also recommend those investment opportunities that have the potential to achieve your goals.