PNB Housing Finance - Business transformation underway; modest growth and return metrics - ICICI Securities

PNB Housing Finance's (PNBHF) earnings at Rs1.3bn were down 45% QoQ due to higher provisioning and run-down in AUM. Reported stage-3 (at 4.44%) settled near to Q3FY21 proforma stage-3. However, retail stage-2 at 5.1%, corporate stage-2 at 10% and restructuring of >2.7% can make balance sheet vulnerable to incremental stress. Strategically, business transformation is underway with new agenda to 1) target mass retail housing, build high yield 'Unnati' portfolio; 2) drive efficiency through cost management and digital drive; and 3) strengthen the team and improve gearing. This transition will moderate growth, though risk-adjusted return will be better over the medium term. With anticipated RoE of sub-13% and modest AUM growth of 5% over FY21-23E, we assign fair multiple of 0.7x. Maintain HOLD with a revised target price of Rs385 (earlier: Rs360). Key risks: 1) Faster-than-anticipated resolution of stress, and 2) change in credit rating outlook post the proposed equity raise.

- Strategically, business transformation is underway with new agenda: Business transformation is underway with new agenda set towards targeting mass retail housing leveraging the expertise and building high yielding 'Unnati' portfolio by strengthening distribution in tier-2/3 cities. To strengthen the core, it is firming up the management team with five external hires (Head - Collections, Chief Information Security Officer, Head of SG&A, Internal Auditor and Affordable Housing) and two internal promotions. It is also accelerating digital drive, augmenting data analytics team, improving business positioning and strengthening underwriting and collection under the project 'IGNITE'.

- Positively stage-3 assets settled near to pro-forma disclosed in Q3FY21: Reported stage-3 (at 4.44%) settled near to Q3FY21 pro-forma stage-3 (no rise is positive surprise). Collection efficiency in retail was 98.3% in Q4FY21 (99% in March). In FY21, coupled with higher delinquencies, recoveries too have gained traction. Corporate account of Rs1.5bn slipped in Q4FY21. Of corporate book, 12.7% is in stage-3 assets and for retail assets, it is 2.5%. However, retail stage-2 at 5.1%, corporate stage-2 at 10% and restructuring of >2.7% can make balance sheet vulnerable to incremental stress. Provisioning rise in Q4FY21 was primarily towards stage-2 assets. The company has restructured Rs13.9bn of retail portfolio (2.7%) and Rs3.37bn of corporate portfolio (2.9%) as of FY21. We expect pro-forma stage-3 to touch 6.5% by FY22E and are therefore, building-in credit cost of ~124/68bps for FY22E/FY23E.

- Corporate book - stabilisation and resolution of stress is key: Currently, 58% of the corporate book comprises under-construction projects, 83% is zero DPD and 78% is performing well. Collection efficiency for corporate portfolio with prepayments is in excess of 100%. Currently, 13% of corporate book is in stage-3 (provided at 60%) and 10% is in stage-2. Five accounts with exposure of Rs8.75bn (7% of corporate book) were identified for voluntary SICR (classified in stage-2). Resolution efforts are underway for the balance stress (Vipul Ltd with exposure of Rs3.5bn is in final stage). However, delay in resolutions and concentrated nature of the portfolio (top 20 exposures forming 69% of corporate book with average ticket size of Rs4bn) expose PNBHF to the risk of further higher credit cost. It has a provision buffer of 14% on the overall corporate book.

- Corporate book deleveraging continues; strategy is 'go retail': PNBHF is down-selling and deleveraging its corporate book - down 19% YoY, thereby, dragging AUM down 11% YoY. Strategically, the focus is on driving retail housing growth. Encouraging in Q4FY21, logins (up >20%), sanctions (up >30%) and disbursements (up >50%) have gained traction over pre-covid levels. The company has articulated a strategy of focusing on mass housing and the high-yielding (Unnati) retail segment - constituting 10% of disbursements. Retail segment constitutes 96% of incremental disbursements in FY21, within retail too, the focus is on individual home loans (68% of disbursements). Average yield for incremental disbursements is 9.22% (excluding Unnati loans) and the key will be to manage balance transfer (out) given the competition intensity in individual home loans. We expect AUM growth of 5% CAGR over FY21-23E.

- NIMs at 3.3% supported by securitisation income: NIM remained stable at 3.3% supported by securitisation income (36bps NIM impact) and offset by Rs280mn of interest on interest reversal for loans above Rs20mn (15bps impact). Incremental cost of borrowing at 6.26% in Q4FY21 supported decline in on-book cost of borrowings at 6.8% in FY21. However, benefit of funding cost was passed on in terms of lower lending yields and mix too shifted in favour of low yielding retail. Yield ex-securitisation was down 40bps QoQ. Net interest income was flat QoQ.

The company is continuously engaging with credit rating agencies to appraise them of the improving business fundamentals and strategic change to evaluate rating upgrade.

Shares of PNB Housing Finance Ltd was last trading in BSE at Rs.379 as compared to the previous close of Rs. 376.9. The total number of shares traded during the day was 26020 in over 786 trades.

The stock hit an intraday high of Rs. 385.45 and intraday low of 371.5. The net turnover during the day was Rs. 9843465.

Source : Equity Bulls

Keywords