Home / Companies / News /  What explains the irrational rally in DHFL shares?

The shares of Dewan Housing Finance Corp. Ltd (DHFL) have been rising continuously, even though the company is about to delist its shares from the exchanges as part of its bankruptcy resolution. Mint explains why the stock is on a high.

What’s going on with DHFL’s shares?

Since 18 May, the shares of DHFL, which is undergoing insolvency proceedings at the National Company Law Tribunal (NCLT), have been rising consistently. The stock gained 51.82%, rising from 15 to 22.85. In June alone, the stock rose 27% after rallying 17% in May. But the stock is down 23% in this year so far, following a 76% jump in 2020. Starting 13 November 2020, the stock hit the upper circuit for 19 days, jumping from 15.60 to 41.70, making a gain of 167.30%. However, the rally fizzled out, with the stock hitting the lower circuit for seven sessions. On Tuesday, the stock closed at 22.85, up 2.05 or 9.86%.

Is the stock euphoria rational?

Analysts say it is not. Two primary reasons are driving the stock, they said. First, investors are hopeful that a plea filed in the Delhi high court by depositors challenging the constitutional validity of the financial service providers rule under the Insolvency and Bank-ruptcy Code will offer good news. Second, stocks in the news have a tendency to fall prey to speculative trading, despite the fundamentals. “Equity shares of DHFL are likely to be extinguished as part of its acquisition because of NCLT’s insolvency process. There can be a significant risk of you losing your entire investment by trading in this stock," Zerodha said.

The rally
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The rally

How is Piramal going to acquire DHFL?

Piramal Capital and Housing Finance Ltd has offered 37,250 crore to DHFL’s creditors, including a payment of 12,700 crore in cash upfront, 3,000 crore in interest income on DHFL’s books, and non-convertible debentures worth 19,550 crore to be repaid over 10 years. DHFL shares will be delisted after the acquisition.

What is DHFL’s shareholding pattern?

Retail investors hold most of the stake in DHFL, according to BSE. In the March quarter, retail investors held 42.19% of the stock, which is a significant rise from the 21.55% in March 2019 and 38.67% in March 2020. Foreign institutional investors have, in contrast, reduced their stake. In March 2019, they held 17.65%. This came down to a mere 1.92% in March 2021. LIC’s holding has been constant at 3.44%. Mutual funds holdings were at 0.01% in March 2021, down from 1.09% in the corresponding month of 2019.

What does the DHFL deal hold for Piramal?

The acquisition is a step towards the demerger of the group’s financial services and pharmaceuticals businesses, according to analysts. On the business side, the proposed acquisition will also help Piramal Capital and Housing Finance diversify its loan book into the retail segment and improve the mix between wholesale and retail. The asset quality of DHFL’s retail loan book, however, remains a key monitorable. Business integration may also take some time.

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