PNB Housing Finance IPO: Should you invest?

The Rs 3,000 crore initial public offer (IPO) of PNB Housing Finance opens on Tuesday in a price band of Rs 750 - 775. The company intends to utilise the IPO proceeds to augment its capital base in order to meet there future capital requirements.

Public sector lender Punjab National Bank (PNB) has 51% stake in PNB Housing Finance, which will drop to around 35% post the IPO. At the upper end of the price band, the PE ratio is 28.10 times to its FY2016 earnings, higher than the industry PE of 25.98.

 

According to reports, the Rs 3,000 crore PNB Housing Finance IPO will be the second largest thus far in terms of amount raised in calendar year 2016, only after private life insurer ICICI Prudential Life Insurance that raised over Rs 6,000 crore earlier this year.

So, should you invest in the IPO? This is what leading brokerages and research houses across the country suggest:

QUANT RESEARCH

PNB Housing Finance has reported around 68% compunded annual growth rate (CAGR) growth in loan book from FY13-16. We believe the same is mainly attributable to lower base, faster geographic expansion and relatively low penetration for housing finance business. The company had been largely focused on high ticket housing loan; the segment which we believe is already witnessing a major slowdown during recent times. Hence similar stronger growth numbers is difficult for the company to manage in coming periods. 

Going forward, with shift in management’s focus towards low income housing products along with further geographic expansion in western and southern India, the company is expected to manage stable growth momentum (around 20-25%) in coming periods as well.

At upper band, the company will quote at 2.3x Price/Book FY16 (post dilution), which is quite reasonable compared to peers like CanFin Homes which is trading at 6x Price/Book FY16 numbers. Considering healthy business momentum, relatively low risk model as well reasonable valuations, we recommend SUBSCRIBE to the issue.

RELIGARE SECURITIES

In the price band of Rs 750 - 775, company is valued at ~2.4x FY16BV (post IPO), which is slightly stretched visa-a-vis DHFL (around 1.8x) but it is still cheaper than Can Fin (around 6x) and HDFC (around 4x). PNB Housing Finance's foray into affordable housing targeting Tier II/Tier III cities, growth prospects, steady asset quality and strong ROE (18%) will support its valuations over the next couple of years.

IIFL

PNBHF’s loan book has grown at round ~61.8% CAGR over FY12-FY16. However, we expect the growth momentum to continue but at moderate pace. Going ahead, its scalable operating model, superior asset quality, lower borrowing cost and operating leverage benefit over medium term will aid to improve its RoA. We believe the valuation demanded by the company is justified given the strong growth prospects. We recommend a ‘SUBSCRIBE’ to the issue.

K R CHOKSEY RESEARCH

While the historical credit growth has stood robust at 68% CAGR over FY13-FY16, sustenance of such healthy growth trends stand challenging given the anaemic retail housing market. That said, the current augmentation of capital base and widening distribution network should help maintain 20% annual business growth over the forthcoming periods. 

On FY16 basis pre-issue PNB Housing Finance is placed at 4.5x P/BV (BV at Rs 169). Post issue, the stock is expected to trade at 2.3x P/BV FY17E and 2x P/BV FY18E. While FY18 valuations stand attractive, downside risks; viz, equity dilution, anticipated asset quality pressures ahead particularly on account of higher proportion of non-retail loans and unlikelihood of RoEs sustenance at current high levels. 

As the short-term challenges persist in terms of sustenance of higher levels growth and profitability with higher likelihood of asset quality risks emerging from non-retail segment, we believe the company can be bought only to reap long-term benefits.

IDBI CAPITAL

What differentiates PNB Housing Finance are the return ratios and leverage, where PNB Housing’s smaller peers are delivering better RoE at a lower leverage. This is mainly on account of the cost-income ratio, which is on the higher side for PNB Housing. We believe the RoE shall get more robust as operating leverage kicks in for PNB Housing. 

We feel there are strong earnings levers for PNB Housing over next two-three years that could actually push up its valuations. We would like to highlight Repco Home Finance in this regard, whose valuations have re-rated from 1.9x 1-yr forward P/ABV at IPO price to around 4.5x now. It may be noted that Repco was almost 1/10th the size of PNB Housing at the time of listing. 

Repco’s strong growth and improving earnings strength led to a steady re-rating for the stock. We see PNB Housing’s presence in perceptibly more risky segments than Repco did (pure housing with self-employed category) as the key risk to such re-rating. 

We recommend investors to SUBSCRIBE to PNB Housing Finance IPO for the strong compounding story it offers in an attractive growth segment.