Are PNB HF's premium valuations sustainable?

Continued market share gains, healthy asset quality to support valuations

Since making its debut on the bourses on November 7 last year, PNB Housing Finance (PNB HF) has rewarded investors handsomely. The stock has more than doubled in this period (over its issue price) to Rs 1,649. Valuations, too, have re-rated, with its price to book valuations having raced ahead of larger peers like Indiabulls Housing Finance (Indiabulls HF) and Dewan Housing Finance Corporation (DHFL). At current levels, PNB HF trades at 4.4 times the FY18 estimated book, as against 3.6 times and 1.7 times for Indiabulls HF and DHFL, respectively. Though some factors that differentiate PNB HF from its peers, these premium valuations appear sustainable. 
 
Higher exposure to the under-served but riskier segment of self-employed borrowers is one. This segment forms 41 per cent of PNB HF’s loan book, as against industry average of about 25 per cent. This along with ramp-up in branch network (one-third of peers) has pushed PNB HF’s market share to 1.6 per cent in FY17 from 0.5 per cent in FY12. As the company continues to enter new areas and step up distribution in existing ones, its market share is likely to improve further. Analysts at JM Financial expect the company’s market share to increase to 2.9 per cent by FY20. In fact, despite having a 15 per cent exposure to the riskier segment of loan against property (LAP), PNB HF’s asset quality has remained pretty strong with negligible gross non-performing assets ratio of 0.22 per cent in FY17 as against 0.8-0.9 per cent for the above peers. Ritika Dua, analyst at Elara Capital, says, “Given the risks around the sector, upcoming regulations and an unseasoned (new) book, we expect PNB HF’s gross
 

Source: Companies, brokerage estimates

NPA ratio to increase to 0.60 per cent by FY19, although it would still be lower than peers like Indiabulls Housing Finance and DHFL.”
 
As the company has been expanding rapidly, its cost to income ratio has been on the higher side. However, as growth improves this could normalise, albeit gradually. Analysts peg earnings growth at 25-30 per cent annually over the next two-three years, which in turn could drive a 100-150 basis points increase in its return on equity ratio. In this backdrop, most analysts are positive on the PNB HF scrip.
 
Continued high competitive intensity, any downgrade in rating of parent — Punjab National Bank leading to higher borrowing costs are some of the key downside risks.