Why the Street is positive on PNB Housing despite rich valuations

At over 3x FY19 price-to-book, analysts say high growth prospects support valuations

In just about a year of its listing (November 2016), PNB Housing has been quick to grab the Street’s attention. After listing, gains of over 55 per cent have been adequately supported by fundamentals, quarter after quarter, with the momentum being maintained in September 2017 quarter (Q2). In fact, despite the 19 per cent correction from its end-August peak of Rs 1,715, the stock is still among the top performers in the housing finance space in the past one year. Even now, eight of the 12 analysts polled on Bloomberg recommend ‘buy’ on PNB Housing despite the tall asking rate of 3.2x FY19 estimated book value. So, what is helping PNB Housing stand out?
 
Analysts at Jefferies say PNB Housing’s valuations are admittedly at a premium, but this could sustain until growth decelerates or asset quality slips, which is unlikely in the near term, according to them. Q2 results also iterate Jefferies’ confidence. Net interest income for the financier grew by 69 per cent to Rs 386 crore, while net profit expanded by 51 per cent to Rs 208 crore, over the year-ago quarter. At a time when bond yields are rising and competition is also heating up, PNB Housing managed to improve its profitability or net interest margin (NIM) from 2.8 per cent a year ago to 3.2 per cent in Q2. That said, the scope to increase NIMs further from the current level appears limited given that PNB Housing depends on bond markets substantially to meet its funding requirements. Non-convertible debentures and commercial papers account for 61 per cent of its total liabilities.
 
While borrowing rates could increase, the strong underlying demand for loans should help PNB Housing pass on this burden to a reasonable extent. For instance, a noteworthy loan book growth of 51 per cent to Rs 48,749 crore helped the financier do better on all fronts in Q2. PNB Housing has exposure to three categories of borrowers: It funds individual borrowers (accounting for 59 per cent of loan book), realtors or developers (12 per cent) and has 29 per cent exposure to non-housing borrowers. Thus, a diversified book helps the financier grow in a balanced manner. Disbursements increased by 49 per cent, with much of it coming from housing loans.

 
If the widespread loan book is an advantage, PNB Housing’s ability to maintain strong asset quality which has even seasoned after listing, is another attractive aspect. Interestingly, this is despite the financier’s 33 per cent exposure to the riskier loan against property (LAP) segment. PNB Housing’s LAP exposure is on the higher side compared to peers such as HDFC, LIC Housing, Indiabulls Home Finance and Dewan Housing. Yet, with gross and net non-performing assets (NPA) ratio of 0.3 per cent each in Q2, the LAP exposure is hardly a sore point for the financier and reiterates its strong underwriting practices.
 
With these positives to back the stock, analysts polled on Bloomberg anticipate the stock to fetch 14 per cent gains (target price of Rs 1,582) in the next 12 months.