But growth & RoEs to soften in interim; upgraded to ‘Buy’ with TP going up to Rs 678
PNB Housing Finance’s (PNBHF’s) Board approval for preferential issue, to raise Rs 40 bn @ Rs 390 per share, reduces the overhang on much awaited equity infusion and/or stake sale. It also brings with it a few notable positive triggers: (i) 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; (ii) Aditya Puri’s nomination to the Board will lend considerable credence to the company’s business transition and strategic intentions; (iii) 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. 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%).
Strengthening of the Board, management, governance and risk management, coupled with scarcity premium, can drive re-rating to 1.2x FY23E book. Upgrade to Buy with a revised target price of Rs 678 (earlier: Rs 385). Key risks: (i) Business transitioning taking longer than expected; and (ii) Corporate book stabilisation and resolution of stress would be key monitorable.