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Business transformation underway; modest growth and return metrics

PNB Housing Finance’s (PNBHF) earnings at Rs1.3bn were down 45% QoQ due to higher provisioning and run-down in AUM. Reported stage-3 (at 4.44%) settled near to Q3FY21 proforma stage-3. However, retail stage-2 at 5.1%, corporate stage-2 at 10% and restructuring of >2.7% can make balance sheet vulnerable to incremental stress.

Strategically, business transformation is underway with new agenda to 1) target mass retail housing, build high yield ‘Unnati’ portfolio; 2) drive efficiency through cost management and digital drive; and 3) strengthen the team and improve gearing. This transition will moderate growth, though risk-adjusted return will be better over the medium term.

With anticipated RoE of sub-13% and modest AUM growth of 5% over FY21-23E, we assign fair multiple of 0.7x. Maintain HOLD with a revised target price of Rs385 (earlier: Rs360). Key risks: 1) Faster-than-anticipated resolution of stress, and 2) change in credit rating outlook post the proposed equity raise.

* Strategically, business transformation is underway with new agenda: Business transformation is underway with new agenda set towards targeting mass retail housing leveraging the expertise and building high yielding ‘Unnati’ portfolio by strengthening distribution in tier-2/3 cities. To strengthen the core, it is firming up the management team with five external hires (Head - Collections, Chief Information Security Officer, Head of SG&A, Internal Auditor and Affordable Housing) and two internal promotions. It is also accelerating digital drive, augmenting data analytics team, improving business positioning and strengthening underwriting and collection under the project ‘IGNITE’.

* Positively stage-3 assets settled near to pro-forma disclosed in Q3FY21: Reported stage-3 (at 4.44%) settled near to Q3FY21 pro-forma stage-3 (no rise is positive surprise). Collection efficiency in retail was 98.3% in Q4FY21 (99% in March). In FY21, coupled with higher delinquencies, recoveries too have gained traction. Corporate account of Rs1.5bn slipped in Q4FY21. Of corporate book, 12.7% is in stage-3 assets and for retail assets, it is 2.5%. However, retail stage-2 at 5.1%, corporate stage-2 at 10% and restructuring of >2.7% can make balance sheet vulnerable to incremental stress. Provisioning rise in Q4FY21 was primarily towards stage-2 assets. The company has restructured Rs13.9bn of retail portfolio (2.7%) and Rs3.37bn of corporate portfolio (2.9%) as of FY21. We expect pro-forma stage-3 to touch 6.5% by FY22E and are therefore, building-in credit cost of ~124/68bps for FY22E/FY23E.

* Corporate book – stabilisation and resolution of stress is key: Currently, 58% of the corporate book comprises under-construction projects, 83% is zero DPD and 78% is performing well. Collection efficiency for corporate portfolio with prepayments is in excess of 100%. Currently, 13% of corporate book is in stage-3 (provided at 60%) and 10% is in stage-2. Five accounts with exposure of Rs8.75bn (7% of corporate book) were identified for voluntary SICR (classified in stage-2). Resolution efforts are underway for the balance stress (Vipul Ltd with exposure of Rs3.5bn is in final stage). However, delay in resolutions and concentrated nature of the portfolio (top 20 exposures forming 69% of corporate book with average ticket size of Rs4bn) expose PNBHF to the risk of further higher credit cost. It has a provision buffer of 14% on the overall corporate book.

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