PNB Housing: Fundamentals need to catch up with the stock now, say analysts

Shares of PNB Housing Finance (PNB HF) have soared a massive 58 per cent in three days on the bourses after the housing financier announced equity infusion worth Rs 4,000 crore, led by Carlyle Group, removing a key overhang on the company’s growth outlook.

The fact that the capital raising plan was nearly double than what the Street had expected (Rs 1,800 crore) has helped the counter jump a massive 279 per cent from its 52-week low level of Rs 183, hit on June 2, 2020.

However, what’s now left for the company, according to analysts, is to deliver on the growth projections that don’t look promising - at least till financial year 2022-23 - 2023-24 (FY23-FY24).

"The capital infusion plan should help PNB HF to refocus on growth after six quarters of loan book contraction. However, as it’s likely to continue shedding its wholesale book (16 per cent of AUM), net balance sheet growth will take longer to come through even as disbursements pick up in the retail loan portfolio (Loan Against Property or LAP and affordable)," note analysts at Credit Suisse.

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As it is, the stock is trading ahead of the consensus estimate by analysts. The highest target price on the stock (Rs 678) is 2 per cent below its current price, while the lowest price (Rs 575) is 17 per cent below its CMP.

Credit Suisse has "Neutral" rating on the stock as it believes the expected growth in loan book will be gradual. Moreover, as Punjab National Bank’s stake will fall to 20 per cent (from 33 per cent) after the latest capital infusion, "it could be perceived to shed its quasi-SOE (quasi-state-owned enterprise) status, thereby losing some benefit of a strong parentage," the brokerage’s report said.

Fund infusion

According to the proposal, PNB HF will issue 82 million equity shares at Rs 390 apiece and will also issue 20.5 million convertible warrants at Rs 390 apiece which will be exercisable within 18 months from the date of their allotment.

Carlyle Group is contributing 80 per cent of the capital raise, with the remaining 20 per cent from General Atlantic, Alpha Investments (managed by SSG Group) and Salisbury Investments (family office of Aditya Puri, ex-chairman, HDFC Bank). Post this transaction, Carlyle's stake will increase to 50 per cent (from 32 per cent) and PNB's stake will dip to 20 per cent.

The fund infusion will help spur growth for the company going ahead, which according to analysts at Morgan Stanley, could increase net profit of PNB HF to Rs 1,790 crore by FY24, up from an expected profit of Rs 1,200 crore in FY22 and Rs 1,580 crore in FY23. ICICI Securities, meanwhile, pegs profit after tax (PAT) at Rs 929 crore (FY22) and Rs 1,521 crore (FY23). In FY21, its PAT stood at Rs 930 crore.

The net interest income (NII), on the other hand, is seen mildly higher at Rs 2,643.8 crore (FY23), up Rs 2,351.9 crore in FY22 and Rs 2,322.9 crore (FY21).

That apart, fund raising from financial institutions and debt markets may also ease for PNB HF going forward as there could be a sharp uptick in capital adequacy ratio (CAR) to 28 per cent while reducing debt to equity ratio from 6.7x to less than 5x.

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"This will instill confidence in the debt market, thereby improving visibility on debt rating upgrade. PNB HF will also accelerate its borrowing capabilities (at lower cost) for retail-focused growth," noted ICICI Securities.

For those at Kotak Institutional Equities, the capital infusion by strong enterprises will alleviate concerns arising from PNB reducing its stake and the housing financier losing backing of a strong parent entity.

That said, the PNB-arm may continue to face asset quality issues. Currently, 12.7 per cent of PNB HF's corporate book is in stage-3 NPA while it is 2.5 per cent for the retail book. Moreover, corporate and retail loans under stage-2 NPA stand at 10 per cent and 5.1 per cent, respectively.

"Restructuring too is for over 2.7 per cent of loans which can make the balance sheet vulnerable to incremental stress… From the current pro-forma stage-3 loans of 4.5 per cent, we expect it to touch 6.5 per cent by FY22E and are therefore building-in credit cost of ~130/70bps for FY22E/FY23E," said ICICI Securities.

Given this, KIE believes the company will need to rapidly scale up its LAP (26 per cent of loans including non-residential premises) and recent affordable/mass housing offering to drive loan book growth.

Keeping in mind the above mentioned factors, analysts expect PNB HF’s earnings per share (EPS) and book value per share to drop going ahead.

Morgan Stanley has cut earnings per share (EPS) and book-value per share (BVPS) forecasts for F22-24 by 6-14 per cent and up to 6 per cent respectively, while those at ICICI Securities peg EPS at Rs 34.3 in FY22 (from Rs 55.2 in FY21).