Insolvent DHFL Reports  Profit In Q3 With Many Ifs And Buts
A signage of Dewan Housing Finance Corporation Ltd. (DHFL) is pictured on top of a building in Mumbai, India. (Photo: BloombergQuint)

Insolvent DHFL Reports Profit In Q3 With Many Ifs And Buts

Dewan Housing Finance Corporation Ltd., which is undergoing insolvency proceedings, reported a profit during the quarter ended December, helped by a tax adjustment. The earnings, prepared under charge of the administrator appointed by the Reserve Bank of India, outlined a series on ongoing investigations surrounding the company’s affairs, which could alter the financial picture.

DHFL reported a profit after tax of Rs 934.35 crore for the third quarter of 2019-20 compared with Rs 313.6 crore a year ago. In the second quarter, the non-bank lender had reported a net loss of Rs 6,705 crore.

During the quarter, the company adjusted for deferred tax assets of Rs 1,102 crore, as it decided to move to the lower corporate tax rate announced by the government. Net interest income for the quarter stood at Rs 960.83 crore, up 6.3 percent from the year-ago period.

The reported net interest income and profit, however, does not provide a fair picture as DHFL is under moratorium as per insolvency rules and has not paid interest on borrowings. “The company has not provided for interest amount of Rs 527 crore on borrowings since insolvency commencement date, that is, Dec. 3, 2019 based on the opinion from legal advisers,” the release said.

If the interest was accrued on borrowings, the profit for the quarter and nine months would have been lower by Rs 392 crore, the company said.

Qualifications To Earnings

The earnings came amid ongoing investigations into various aspects of DHFL’s operations. Many of these were flagged off by the company’s auditors during previous quarterly earnings reports.

Inter-Corporate Deposits

Auditors had identified Rs 5,652.69 crore in inter-corporate deposits outstanding as of March 31, 2019. Of these, Rs 1,129.36 crore has been repaid and Rs 1,306.6 crore have been converted into term loans. Outstanding inter-corporate deposits stand at Rs 3,793.76 crore. The recoverability or otherwise of these is yet to be ascertained, the company said.

Fair Value Of Corporate Loan Portfolio

DHFL’s corporate loan portfolio had been “fair valued” at Rs 42,361 crore in previous quarters based on an internal valuation. The resulting fair value loss was estimated at Rs 5,986 crore. Of this, Rs 4,852 crore was accounted for up to September 2019. The balance Rs 1,134 crore has been charged to the profit and loss statement in the third quarter.

Mismatch In Loan Portfolio

There exists a mismatch to the extent of Rs 3,018 crore that is yet to identified and mapped to individual parties and the underlying securities available, if any, out of the available surplus security covers.

Ongoing Investigations

The administrator informed exchanges that multiple issues of financial significance, which were highlighted by joint statutory auditors in previous reports, are currently being investigated by the concerned agencies, such as the Serious Frauds Investigation Office and the Enforcement Directorate. The outcome of the investigations and their impact on the company’s financials are not yet known.

Net Worth Eroded

The company has incurred a loss of Rs 6,089 crore in the nine months ended December, 2019, eroding its net worth substantially.

However, DHFL’s administrator noted that these financial results have been drawn on ‘going concern’ basis under the Corporate Insolvency Resolution Process, the outcome of which cannot be currently ascertained. “We are therefore unable to comment as to whether the ‘going concern’ basis for the preparation of these financial results is appropriate,” the administrator said.

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