Extreme volatility: Stocks fickle on Freaky Friday – NBFC, HFC shares tank on liquidity scare

By: and |
Mumbai | September 22, 2018 3:26 AM

NBFC, HFC shares tank on liquidity scare; Sensex regains some ground after over 1,000-point flash crash.

Stocks fickle on Freaky Friday – NBFC, HFC shares tank on liquidity scare

Volatility ruled in India’s stock markets on Friday after a liquidity scare resulting from the sale of debentures of housing finance company (HFC) Dewan Housing Finance (DHFL) at yields higher than expected led to a huge sell-off in the shares of non banking financial companies (NBFCs) and HFCs. The DHFL stock ended 42.4% down at Rs 351.55, Indiabulls Housing Finance ended 8.2% lower at Rs 1,061.90 and Can Fin Homes closed 5.7% down at Rs 290.25.

The session saw wild swings in the indices and sharp falls in the Bank Nifty, NSE MidCap and Small Cap indices. The Sensex tumbled about 280 points to close at 36,841.60, down 0.75%, after investors were jolted by an over 1,000-point dip in mid-afternoon trade. The broader Nifty too suffered a mid-session plunge and ended at 11,143.10, down 91.25 points. The indices closed with losses for the third straight week.

So far in September (till September 19), foreign portfolio investors have sold stocks worth $533 million while local wholesale investors have bought shares worth $563 million. Goldman Sachs cautioned in a recent report that India’s stocks were overvalued and downgraded the country to market-weight.

The massive sell-off in stocks of NBFCs on Friday was led by the fall in shares of DHFL, which tumbled over 50% on fears of a liquidity crisis. The apprehensions arose after DSP Mutual Fund sold debentures of DHFL at a reported yield of 11%. This yield was higher than expected given the company had, in the last round of fund-raising two months ago, borrowed at around 9.5%.

The market believes debt paper is being sold ahead of a tightening in the money markets and that there may be more supply in the coming weeks since yields are on an uptrend.

There is anxiety there may not be enough buyers.

Kalpen Parekh, president, DSP, said in an interview to a business channel that the fund had sold around Rs 300 crore worth of debentures to express “our interest view, not a credit view”.

DHFL has a strong liquidity position and sufficient funds available to service any repayment obligations, chairman Kapil Wadhawan said.

The financial crisis in IL&FS, which has defaulted both on commercial paper and inter-corporate deposits, and has been downgraded to junk in a matter of weeks, had led to fears investors may not find buyers for debt paper of NBFCs and HFCs. IL&FS owes lenders a whopping Rs 93,000 crore and the short-term repayments due are believed to be in the region of Rs 25,000 crore. Mutual funds and insurers may be looking to sell exposures to NBFCs, market watchers said.

Fund managers said money was becoming tighter pointing out that a typical AAA borrower was accessing credit at 120 basis points higher than at the start of the year and about 180 basis points higher than a year ago. Consequently, mutual funds were attempting to replace long-term paper with bonds of a shorter maturity.

In a statement, DHFL said it has not defaulted on any bonds or repayment nor has there been any single instance of delay on any of its repayment of any liability. The company added that it holds liquidity of approximately Rs 10,000 crore, which is equivalent to around six months of cash. DHFL’s commercial paper book is about 6% of its total borrowings and the total asset and liability book is worth over Rs 1 lakh crore.

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