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Preferential issue called off; overhang resurfaces

PNB Housing Finance’s (PNBHF) Board has decided not to proceed with the proposed preferential issue of Rs40bn @Rs390 per share to Carlyle group, General Atlantic, SSG Group and other investors. Preferential issue has been held up for more than 4 months (after already taking over 2 years), due to the pending legal proceeding before SAT. Also, in an exchange filing, the company highlighted that there is lack of visibility or certainty as to the timeline for judicial determination of the legal issues and regulatory approvals were not expected to be forthcoming amidst litigation.

With proposed deal being off the table, the overhang resurfaces:

* Carlyle raising its stake to 50% and thereby, PNB’s stake coming down to ~20% would have put to rest the overhang of any further stake sale in the interim.

* Equity infusion of Rs40bn would have led to sharp uptick in CAR and reduced gearing to <5x. Improvement in capital adequacy ratio and low gearing would have instilled confidence in debt market and hence, prospects of debt rating could have improved, which is now unlikely.

* Carlyle group raising stake was in-line with the company’s stated strategy of strengthening governance, management and the Board. Mr. Aditya Puri’s nomination to the Board would have lent considerable credence to the company’s business transition and strategic intentions.

* With deal being called off, concerns related to asset quality and growth re-emerge.

Proposed preferential issue was a notable trigger for re-rating of stock as it would have strengthened balance sheet and supported growth. Stock has almost doubled since the announcement of capital infusion in May 2021. With the deal being called off, stock is likely to derate again to 0.75x FY23E book (from 1x currently) as earnings and growth momentum would derail. We cut our earnings estimate by >10%/>20% for FY22E/FY23E. Given this adverse development, we revise our target price to Rs485 (earlier: Rs848). Downgrade to ‘SELL’ from Buy.

* Lack of visibility and uncertainty force it to call off the deal: Preferential issue has been held up for more than 4 months (after already taking over 2 years), due to the pending legal proceeding before the Securities Appellate Tribunal (SAT). There is lack of visibility or certainty as to the timeline for judicial determination of the legal issues, in particular as a third member of the SAT is yet to be appointed. Also, there is no clarity on the shareholders’ approval and regulatory approvals will not be forthcoming amidst pending legal proceedings. Board has, therefore, decided not to proceed with the preferential issue and the share subscription agreements executed with the proposed allottees have been terminated. Consequently, Pluto Investments will be initiating the process to withdraw the open offer made by them (at Rs403).

* Equity raising a top priority; quantum and mode unlikely to be equally reassuring: Capital infusion is must and the Board too has taken cognisance of capital raising requirement at the earliest. However, the question now is what quantum will be raised and what mode will be evaluated. We believe it is unlikely to be as reassuring as the proposed preferential issue of Rs40bn (to existing PEs) that is now terminated.

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