Sensex down 300 points, after plunging over 1,100 points3 min read . Updated: 21 Sep 2018, 11:07 PM IST
Sensex dives 1,100 points amid a panic sell-off in shares of housing finance firms before recouping losses
Mumbai: Stock market investors were in for a roller coaster ride on Friday as the benchmark Sensex dropped as much as 1,100 points before recovering to close 280 points down as concerns about housing finance companies soured sentiment.
BSE’s 30-share Sensex ended the day 0.75% lower at 36,841.60 points, while the National Stock Exchange’s 50-share Nifty shed 0.81% or 91.25 points to close at 11,143.10.
Earlier in the day, the Sensex declined 3.04%, or 1,127.58 points, to 35,993.64, while Nifty fell as much as 3.27%, or 367.90 points, to 10,866.45.
The markets dropped tracking a sharp sell-off in Dewan Housing Finance Ltd (DHFL) shares, which plunged 59.67% to ₹ 246.25. DHFL is a liquid stock and part of the derivatives segment, and hence has no circuit limits. The shares later recovered partially, closing 42.4% lower at ₹ 351.55.
“RBI’s instructions to Yes Bank to replace Rana Kapoor as its chief put a lot of stress on the bank, as well as weaker peers across banks and NBFCs," said Vinay Khattar, head of Edelweiss Investment Research.
The sentiment for financials has turned weak after problems emerged at IL&FS Group and RBI denied a three-year extension to Kapoor, Yes Bank’s managing director and chief executive officer.
“While the change in leadership could be challenging for Yes Bank to maintain growth momentum and manage balance sheet quality, generally tight liquidity conditions indicated by tightening yields put pressure across the sector. DHFL and Indiabulls Housing Finance were the other prominent sufferers," said Khattar.
“The uncertainty surrounding the future of IL&FS and, therefore, liquidity conditions is souring sentiment. Though these issues appear to be transient, they can be a source of significant volatility in the short term," Khattar added.
Market breadth was very weak with more than three stocks declining for every stock that advanced on BSE. Seventeen of 30 Sensex stocks traded lower.
The market panicked after news emerged of DSP Mutual Fund selling DHFL’s one-year ₹ 300 crore paper at 11%. In reaction, Edelweiss Financial Services Ltd fell 3.15%, Srei Infrastructure Finance Ltd dropped 10%, while Indiabulls Housing Finance Ltd shed 8.18%.
However, DSP MF clarified the situation. “Over the last many weeks, we have been reducing some exposure in our fixed income portfolio. Now that broadly interest rates are inching up, we are trying to bring down our portfolio maturity," said Kalpen Parekh, president, DSP Investment Managers Pvt. Ltd. “DHFL happens to be one out of them. We have no credit issue with them, we are just trying to bring down our portfolio maturity. We continue to still hold a significant amount of DHFL papers," said Parekh.
“Mid-September is a very tight phase for liquidity in general in the bond market. We sold one-year DHFL paper worth ₹ 300 crore for 11% out of our book of ₹ 1,200 crore on Wednesday. We have reduced our exposure to many issuers, not just DHFL, to recalibrate our interest rate risk," he added.
The DHFL management was also quick to offer clarification and soothe investor sentiment. “We wish to categorically state that DHFL has not defaulted on any bonds or repayment nor has there been any instance of delay on any of its repayment of any liability. We do not have any exposure with IL&FS," said Kapil Wadhawan, chairman and managing director of DHFL.
“Our fundamentals are strong and we hold a strong liquidity of approximately ₹ 10,000 crore in the system which equates to six months of cash. Our CP (commercial paper) book shall be about 6% of our total borrowings and the total assets and liability book is over ₹ 1 lakh crore. We shall remain cash surplus even after considering repayment till March 2019 of all our liabilities on account of CP, NCD (non-convertible debentures), interest payment, and bank dues," said Wadhawan.
That said, some market participants remained pessimistic.
“The major correction in financials was long overdue and the pack has been radically overvalued for more than two years," said Saurabh Mukherjea, founder, Marcellus Investment Managers.
“We have seen it in different countries and at different times when interest rates are headed north, and currency depreciates, the wholesale-funded lenders tend to suffer," said Mukherjea. “There is a further 20-40% correction for wholesale-funded lenders’ share prices," he added.
The concerns about valuation too continued to bother investors.
“The valuation support for the market is missing. We are moving from a benign liquidity situation to a tighter liquidity situation. Slowing of retail inflows into mutual funds is a concern," said Gautam Chhaochharia, head of research at UBS Securities India Pvt Ltd. “The IL&FS issue has bothered the market, given that we were priced to perfection," he said.