PNB Housing Finance IPO Review – Should you subscribe or not?
PNB Housing Finance – Introduction:
PNB Housing Finance Ltd (PNBHFL) is the fifth largest housing finance company (in terms of loan portfolio) and the second largest (in terms of deposits). Punjab National Bank (PNB) holds a 51% stake in its housing finance unit, which was founded in 1988 as a non-banking financial company. Private equity firm Carlyle Group owns the rest. Carlyle acquired the stake from financial services firm Destimoney Enterprises Pvt. Ltd in February 2015. PNBHFL offers its customers “housing loans” for the purchase, construction, extension or improvement of residential properties or for the purchase of residential plots, and “non-housing loans” in the form of loans against property (“LAP”) to property-owning customers through mortgages over their existing property and any additional security, if required; non-residential premises loans (“NRPL”) for the purchase or construction of non-residential premises; lease rental discounting (“LRD”) loans offered against rental receipts derived from lease contracts with commercial tenants; and corporate term loans (“CTL”), which are general purpose loans to developers and/or corporates for purposes of on-going projects or business needs. PNB Housing has 48 branches and around 800 employees across northern, western and southern regions. Forty percent of its business comes from north India, with south and west both contributing 30% each.
Purpose of the IPO:
The company will utilize net proceeds from this IPO to augment the capital base to meet their future capital requirements; for general corporate purpose; and to enhance visibility and brand name among existing and potential customers.
Key Reasons to subscribe the IPO:
Turnaround in operations post restructuring
PNBHFL shifted to a public private partnership model through a business process re-engineering (BPR) program implemented over the last five years. The BPR program not only ushered in professional management but has also led to improvement, centralization and standardization of business processes, payments and credit policies, changes in origination, product composition and target customers. It also involved significant changes in the credit underwriting and monitoring as well as hiring policies of various personnel. A key change was the adoption of a hub and a spoke operating model. Under this operating model, branches are positioned to act as primary point of sale for loan origination and collection whereas the critical functions loan processing, credit appraisal and monitoring are performed at the process hubs. The BPR also involved development of an integrated information technology platform for all activities and functions and revamping of the PNB brand. As a result of the restructuring initiatives, the NBFC’s loan has grown at a compounded annual rate of 62% in the last four years (F12-FY16). The NBFC today is the fifth largest HFC, the second largest in terms of deposits and is the fastest growing among HFCs.
Well Managed by experienced professionals
The senior management of the NBFC has a strong and rich experience in the mortgage and housing finance industry with many having held senior positions in various banks and financial service companies such as HDFC Ltd, ICICI Bank, Indiabulls Housing Finance, Religare Housing Finance, GRUH Finance and ABN Amro Bank NV. The BPR program has led to the professionalism and autonomy of the management team and efficiency in operations.
Diversified and Low cost funding sources
Being a wholly owned subsidiary, PNBHFL has leveraged on the PNB parentage and raised funds from a diverse set of sources such as term loans from banks and financial institutions, non-convertible debentures, deposits, ECBs, commercial paper, refinancing from NHB and unsecured, subordinated debt. The NBFCs lenders include 31 public and private sector banks, 10 mutual funds, 20 insurance companies, 545 provident funds and 153 pension funds. Backed by good credit ratings, the NBFC has been able to increase the share of NCDs and commercial paper in the overall borrowing mix. As a result, the overall cost of borrowings has fallen from 9.3% in FY14 to 8.67% in FY16. The NBFC enjoys a health capital adequacy ratio that stood at 13.04% as on 30th June 2016.
Multi product portfolio
PNBHFL offers a range of housing and non-housing loan products catering to the needs of consumers with retail loans accounting for a majority 85% of overall loans. Housing loans with a lion’s share of 70% of the loan portfolio, are extended to both salaried as well as self-employed customers. The riskier construction finance loans to real estate developers constituted 9% of the overall loan mix. Among the non-housing finance loans offered are the loans against property (LAP), non-residential premises loans (NRPL), lease rental discounting (LRD), and corporate term loans (CTL). LAP has a share of 18% of the total loan portfolio.
PNBHF has delivered a phenomenal 68 per cent CAGR in loan book over FY12-16, which has resulted in 43 per cent CAGR in PAT growth. NII of the company is consistently growing at five year CAGR of 40 per cent to Rs.684 crore in FY16. The company shows rise in PAT by 77 per cent in FY16 on a yearly basis. PNBHF has cost/income ratio of 30 per cent which is higher than peers, and gives it a scope for cost rationalization. PNBH has managed strong asset quality, with GNPAs/NNPAs at 0.22 per cent and 0.14 per cent respectively (one of the best in industry) & better than large private players. NIM at 2.51 is lower than other HFC’s. We believe to see improvement in NIM post issue of the company. IPO will also help to improve capital adequacy ratio of the company which is at 13.04 per cent in Q1FY17.
Valuation and Conclusion:
PNBHF has delivered RONW and ROCE of 17.6 per cent and 10.09 per cent respectively. PNBHF looks decent with EPS of 27.58 and upper band price-to-adjusted book value of 2.4 times as compared to peers like LIC Housing Finance, Indiabulls Housing, Diwan Housing, and Repco Home Finance. Considering consistent growth, good financial numbers, aggressive management and moderate valuation status, we can see up to 20 per cent upside in IPO post issue.
So, we recommend to go for subscription of this IPO.