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Preferential issue approval will be key trigger; business transformation underway

PNB Housing Finance’s (PNBHF) Q1FY22 earnings beat with PAT almost doubling QoQ was driven by lower credit cost at 104bp vs an average of 133bp in FY21. Nonetheless, stress accretion was elevated as expected: 1) Stage-3 assets rose to 6.0% (4.4% in FY21) with spike in retail stage-3 to 3.8% (2.5% QoQ) and corporate stage-3 at >15% (vs >12% QoQ); 2) stage-2 at 6.5%; 3) restructuring higher than peers at ~2.9%.

Against this stress pool, we were expecting it to build up provisioning buffer. ECL provisions were maintained at 4.5% of advances (4.1% in FY21). Disbursements derailed amidst disruption to Rs18bn, though it is targeting to clock disbursements of Rs140-150bn (40-50% growth over FY21).

Business priorities are set towards targeting mass retail housing, building the high-yield Unnati portfolio and driving efficiency through cost management. Key trigger will be approval for proposed preferential issue to Carlyle (raising its stake to 50%) and Mr. Aditya Puri’s nomination to the Board. This can drive valuations to 1.5x FY23E and we revise target price to Rs848 (earlier: Rs678). Maintain BUY.

* Business transformation agenda – mass retail housing and project IGNITE: 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 further three appointments over five in FY21 and three internal promotions in the last 6 months. It is also accelerating the digital drive, augmenting the data analytics team, improving business positioning and strengthening underwriting and collection under the project IGNITE.

* Stage-3 assets elevated as stress spiked in retail as well as corporate: Reported stage-3 settled higher at 6% (4.4% in FY21) as stress accreted in retail (localised lockdowns impacted collections) as well as corporate segment. Stage-3 in corporate portfolio rose to 15.9% (12.7% QoQ) while for retail assets, it spiked to 3.8% vs 2.5% QoQ. 30% of individual housing loans and 79% of LAP portfolio is aligned towards self-employed which has resulted in elevated stress levels in retail segment. Overall, stage-2 remained stable at 6.45% (6.0% QoQ). On restructuring, the company has restructured Rs17.33bn (2.9% of loan assets). Collection efficiency (in retail) derailed post Mar’21 and it was mere 95.4% in Q1FY22 (98.3% in Q4FY21 and 99% in Mar’21). However, there is visible MoM improvement and July CE settled at 98%. We expect pro-forma stage-3 to settle at 6.5% by FY22E and thereby, decline to 6.0% in FY23E. Hence, we are building in credit cost of 127/59bps for FY22E/FY23E respectively.

* Corporate book – stabilisation and resolution of stress is key: Currently, 60% of corporate book comprises under-construction projects, 63% is zero DPD on a declining base and 77% is performing well. During Q1, the company had downsell/ accelerated prepayment of Rs4.79bn (4% of corporate book) which led to 7% QoQ decline in corporate portfolio. Currently, 15.9% of corporate book is in stage3 (provided for at 55%) while overall coverage on corporate book is 16%. Two accounts with exposure of Rs5.3bn (4.9% of corporate book) namely Vipul Ltd and Ornate Pvt Ltd are in advanced stages of resolution. Resolution efforts are underway for balance stress - Suptetech Ltd with exposure of Rs2.4bn, Radius with exposure of Rs2.6bn and Arena Superstructure Pvt Ltd with exposure of Rs1.87bn. However, delay in resolutions and the concentrated nature of the portfolio expose PNBHF to the risk of even higher credit cost.

* Strategy is ‘go retail’: PNBHF is down-selling and deleveraging its corporate book – down 26% YoY and 7% QoQ, thereby, dragging AUM down 14% YoY and 4% QoQ. Strategically, the focus is on driving retail housing growth which is more secured in nature, granular and has lesser credit cost. In-line with its strategy of retailisation, 94% of incremental disbursements in Q1FY22 were skewed towards retail and 9.29% of disbursements were with respect to ATS of less than Rs20mn. Overall, the company is targeting disbursements of Rs140-150bn in FY22, higher than Rs100bn in FY21. It has articulated a strategy of focusing on mass housing and the high-yielding (Unnati) retail segment, which would be a key growth driver in coming quarters. It has identified 13 new locations that will be operationalised during the year. Going forward, key will be to manage balance transfer (out), given the competition intensity in individual home loans. We expect AUM growth of 3% CAGR over FY21-23E.

* NIMs at 3.2%, down 10bp QoQ in absence of securitisation income: NIM fell 10bp QoQ tp 3.19%, largely due to absence of securitisation income, which had an adverse delta of 25bps this quarter. Average cost of borrowing has been consistently declining from 8.1% in Q1FY21 to 7.5% in Q1FY22 (down 10bps QoQ). Overall, interest expense was lower 4% QoQ. However, benefit of funding cost was passed on in terms of lower lending yields and mix too shifted in favour of low yielding retail portfolio. Average yield for incremental disbursements is 8.41% on housing portfolio and 8.73% on incremental retail portfolio. The company is continuously engaging with credit rating agencies to appraise them of the improving business fundamentals and strategic change to evaluate rating upgrade, which will further lower cost of funds.

* Key trigger will be approval for preferential issue: PNBHF Board has approved a much-awaited capital raising plan of Rs40bn @Rs390 per share through a preferential issue wherein Carlyle group will be contributing 80% of the issue, thereby, raising its stake to 50%. Post the Board approval, stock exchanges have sought clarification from PNBHF and asked them to provide the pricing certificate from a registered valuer and valuation certificate to be comprehensive and to take into account various methodologies alongwith justification, to arrive at the valuation. We are awaiting clarity and visibility on this preferential issue as, if implemented, it would be in-line with the company’s stated strategy of strengthening governance, management and the Board.

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