PNB Housing Finance - Capital infusion brings notable triggers - ICICI Securities

PNB Housing Finance's (PNBHF) Board approval for preferential issue reduces the overhang on much awaited equity infusion and/or stake sale. It also brings with it a few notable positive triggers: 1) Carlyle raising its stake to 50% and PNB's stake to be down to 20% (not expected to go below this), putting to rest the overhang of any further stake sale in the interim; 2) Mr. Aditya Puri's nomination to the Board will lend considerable credence to the company's business transition and strategic intentions; 3) capital buffer (CAR of >28%) is enhanced to adequately face the potential stress due to covid disruption, and gradually improve visibility on rating upgrade. Strategically, business transformation is underway with new agenda to target mass retail housing, build the high-yield Unnati portfolio and drive efficiency through cost management. However, in the interim transitioning phase, growth and RoE will be modest. Strengthening of the Board, management, governance and risk management, coupled with scarcity premium, can drive rerating to 1.2x FY23E book. Upgrade to BUY with a revised target price of Rs678 (earlier: Rs385). Key risks: 1) Business transitioning taking longer than expected; and 2) Corporate book stabilisation and resolution of stress would be key monitorable.

- Preferential issue to existing shareholders reduces overhang: PNBHF Board has approved a much-awaited capital raising plan of Rs40bn @ Rs390 per share through a preferential issue. Carlyle will be contributing 80% of the issue, thereby raising its stake to 50%. Other existing shareholders, viz. funds managed by Ares SSG and General Atlantic, will also participate to maintain their stake at 10% each. A further confidence-boosting announcement is, Salisbury Investments, family investment vehicle of Mr. Aditya Puri (former CEO & MD of HDFC Bank), will also invest Rs250mn in the capital raise (0.2% stake post infusion). In addition, Mr. Puri is expected to be nominated to the Board by Carlyle in due course. This would be in line with the company's stated strategy of strengthening governance, management and the Board.

- Sharp uptick in CAR has reduced gearing though it is book value dilutive: Equity infusion of Rs40bn will lead to sharp uptick in CAR to 28% and reduce gearing to <5x (from 6.7x). This will instil confidence to debt market, thereby improving visibility on debt rating upgrade. PNBHF will also accelerate its borrowing capabilities (at lower cost) for retail-focused growth. Given equity dilution of more than 60% and that too below book value, it would be dilutive to the extent of 10% to book value and 25-30% to EPS and would moderate RoEs further to 10% (from 12%).

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

- Capital buffer augmented to face any potential stress: In the corporate book, 12.7% is in stage-3 assets, while for retail assets it is 2.5%. However, retail stage-2 at 5.1%, corporate stage-2 at 10% and restructuring at >2.7% can make the balance sheet vulnerable to incremental stress. Company has restructured Rs13.9bn of retail portfolio (2.7%) and Rs3.37bn of corporate portfolio (2.9%) as of FY21. From the current proforma stage-3 of 4.5%, we expect it to touch 6.5% by FY22E and are therefore building-in credit cost of ~130/70bps 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 in corporate portfolio with prepayments is in excess of 100%. Currently 13% of corporate book is in stage-3 (provided for 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 the 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 even higher credit cost. It has a provision buffer of 14% on the overall corporate book.

Shares of PNB Housing Finance Ltd was last trading in BSE at Rs.630.2 as compared to the previous close of Rs. 525.2. The total number of shares traded during the day was 28989 in over 358 trades.

The stock hit an intraday high of Rs. 630.2 and intraday low of 630.2. The net turnover during the day was Rs. 18268867.

Source : Equity Bulls

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